Bankruptcy Alternatives

Reuben Nathan
Practicing Personal Injury Attorney at Matrix Law Firm in Los Angeles California

Debt Settlement

While bankruptcy is a viable option, there are other ways to reorganize or eliminate your debt. Debt settlement or debt negotiation is way a person can significantly reduce the amount of debt they owe. Essentially, debt settlement is the process of negotiating with creditors to reduce overall debts in exchange for a lump sum payment. A successful settlement occurs when the creditor agrees to forgive a percentage of total account balance. Only unsecured debts not secured by real assets like homes or autos can be settled. Unsecured debts include medical bills and credit card debts – not student loans, auto financing or mortgages. For the debtor, this makes obvious sense, they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering, sometimes by more than 50%, their debt balances. Whereas, for the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file bankruptcy (in which case, the creditor risks losing all monies owed). This program is intended for those who otherwise cannot qualify for bankruptcy or has the ability to repay the debt.

Debt Management

Debt management is different than debt settlement programs. The premise is that debt management programs (sometimes called debt management plans) may be able to help you negotiate lower interest rates, get late fees waived, work out a payment schedule that’s acceptable to you and to your creditors, and consolidate your monthly payments into one.

Consumer Credit Counseling

If you are in financial trouble and are not able to work a repayment plan with your creditors on your own, a credit counseling service may be able to help. The most common of these services are members of the National Foundation for Credit Counseling (NFCC) with 155 members and 1,425 offices known as Consumer Credit Counseling Services (CCCS). There are about 47 credit counseling services (or “adjustment services companies” as they are technically called) licensed to offer services in Wisconsin. This includes agencies with local offices as well as phone and Internet based services.
What they offer. Credit counseling services provide individual budget counseling and assistance in arranging a payment plan with creditors, usually called a debt management plan (DMP). This is a monthly program that often reduces your bills and consolidates them into one monthly payment. When you sign up for the debt management plan, you deposit money each month with the credit counseling service and they pay your creditors according to a payment schedule developed by the counselor. A successful repayment plan requires you to make regular, timely payments, and could take as long as 48 months or longer to complete. As part of the repayment plan, you may have to agree not to apply for or use any additional credit while you’re participating in the program. Most credit counselors will ask you to surrender or cut up your credit cards.

Cost. The costs are often based on a sliding scale, based on your ability to pay. Typical fees include a start-up fee plus a monthly fee for each month you are in the debt management plan. Typically, most states limit the initial budget setup fee to $50 or $25 for clients that sign up for a debt management plan. However; monthly fees vary, so you do need to check costs before signing any agreement. Some companies charge a flat monthly fee; others base their monthly fee on the number of accounts in your repayment plan.

Most credit counseling services are funded, in part, by contributions from creditors, particularly credit card companies. The credit card companies agree to pay a fee to the counseling service equal to a percentage of the payments sent them each month.

Advantages. Because of their contacts with the credit industry, credit counselors are generally able to negotiate better repayment terms with creditors than you could do on your own. Once you are following a repayment plan, you’ll only make one monthly payment to the counseling service. Most people can get out of debt in three to five years on one of these plans (not including secured debts such as a mortgage.)

Once creditors accept your debt management proposal and receive your monthly payments on time, they are often willing to lower interest rates, waive past late fees and even “re-age” your past due accounts to reflect a current “paid-as-agreed” status. However, some creditors may report to the credit bureaus that your account is being repaid through credit counseling, or that you are late, since technically, you are not making your originally agreed-upon payments. Ask the counselor for specific
information about how each of your individual accounts will be reported to the credit bureaus. While a debt repayment plan can eliminate much of the stress that comes from dealing with creditors and overdue bills, it does not mean you can forget about your debts. You still are responsible for paying any creditors whose debts are not included in the plan. You also need to review the monthly statements from your creditors to make sure your payments have been received. If your repayment plan depends on your creditors agreeing to lower or eliminate interest and finance charges, or waive late fees, you are responsible for making sure these concessions are reflected on your statements.
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