Debt Relief

Sometimes it feels like you’re in an impossible situation. You’ve tried getting a consolidation loan, but with the tight money markets and your crappy credit history, no one wants to be your lender.  So you look at the ads for credit counseling, debt consolidation and debt relief companies and think, “Maybe this is the answer.”

Here are some things you need to keep in mind.

With any debt management plan, you make your payment to the company you’re dealing with, and they distribute most of that money to your creditors. (Yes, they all get their pound of flesh, so you are PAYING for this service, even if it doesn’t feel like it.) So you only have to make one payment. For their fee, these organizations lower your interest costs and eliminate fees, so more of your payment goes to your balance. But if you’re dealing with lenders who won’t compromise, your debt-management plan won’t work as well as if your creditors roll over.

You should research the company with which you’re going to deal very carefully since these organizations range in quality. We’re talking about fixing a problem here, not making a bigger problem. You need to be absolutely sure this is going to work in your favour (when all the costs are counted) before you proceed. Get it in writing. Understand all the terms and conditions. And don’t take, “If we can’t help you, we won’t charge you” as a guarantee. That just means they’ll leave you high and dry if their negotiation fails.

Often when you enroll in a debt settlement plan you will be told to make no payments to your unsecured creditors. This will have to outcomes:  (1) you’ll save the money you would have been making in payments to establish a debt settlement pool, and (2) your creditors will watch your account go into huge arrears, making them more willing to negotiate a settlement. After several months your debt management company will contact creditors and attempt to negotiate favourable lump sum settlement that will be paid out of your debt settlement pool.  Know that if you take this route your credit history will be shot. If you already have a crappy credit history, this may not be a problem for you. But if you’re in the least bit concerned about keeping your credit score shiny, this isn’t the way to go.

While each organization is different, the plans they come up with are pretty much all the same since lenders don’t give preferential treatment to any one company. Your debt management advisor determines how much it will take to pay your creditors off in three to five years. The main benefits are that the interest clock is slowed down (or in some cases stopped completely) and that collectors stop call. And you usually have the option of paying more when you have extra money so you can get back into the black even more quickly.

One of the big drawbacks of using a debt counseling or debt management company is that they don’t come with any serious advice, so people often fulfill their commitment and then go right back out and rack up their debt again. You need to work with a company that does a full assessment of your financial picture. If they company only deals with the debt, you’re at risk for being a repeat offender. If you’re working with someone who is knowledgable and compassionate, the process can be smooth. If your advisor sees you as just one more customer, if she is judgement, if he is pushy, you need to find another counselor.

You shouldn’t think that debt management is the easy way out. You still have lots of work to do. But if you’re getting the right kind of guidance, this can be easier. Be careful however. The last thing you want to have happen is that you get to the end of the process only to find it isn’t the end: that there are fees and interest rates that have accumulated throughout the process and you’re still on the hook. Yup, it’s happened.

Debt management is not right for everyone. I’ve seen people enter into the process and then accept credit and start charging again. Dopes. If you’re not committed to living without credit, don’t even bother getting started. You’re often required to commit to living without credit until you’re debt free, and if you break this rule there can be dire consequences. Also keep in mind that this kind of service works best for those with unsecured debt, like a credit card or unsecured line of credit. If you owe taxes, child support, or on anything for which someone else is signed, this won’t work.

Perhaps the biggest surprise for most people is the fact that consolidation, credit counseling and debt management may not BE bankruptcy, but they are often treated as such by future lenders. Your credit history will take a hit that last as long (or longer, in some cases) than bankruptcy. Anything that says, “He couldn’t manage his bills” is a red flag for lenders.

I’m not a big fan of any of these services.  I believe:

1. If you can’t keep a roof over your head and food in your belly, and pay off your debt in three years or less, you need to go and see a bankruptcy trustee.  You are exactly the person bankruptcy was meant to help, and if you just can’t make it work, bankruptcy may be your only option.

2. If you can make your payments, then you need to call and negotiate with your creditors, come up with a plan and follow through. Taking personal responsibility is the only way to make sure you NEVER make the same mistakes again.  And if you don’t have the wherewithal to make this better, it’s only a matter of time before you back in the hole. It’s your money. Now it’s time to take control of it.

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