Creating a Debt Repayment Plan: Getting Help with Debt Reduction
In our last post, I talked about the process of debt repayment as a plan to take on yourself, the do-it-yourself (DIY) approach, if you will.
However, in reality, sometimes we need help. In the world or debt reduction, there are many options to consider and seek out if you are struggling to get out of debt on your own.
Option 1: Credit Counseling
After trying in vain to make your minimum monthly payments you may finally decide that you can’t do it alone. There’s help available from different sources. We’re not recommending anyone in particular but will reference some of the most popular.
If you decide to get help in fixing your finances, credit counseling might be the first step. It is normally free when sought through non-profit agencies. Trained credit counselors evaluate your financial situation, examine your monthly budget and then help you find ways to lower your monthly payments. These councilors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. They discuss your financial situation with you and help you develop a tailored plan to solve your money problems.
Here are some examples of what credit counselors might do:
1. They help you do what you may have tried to do yourself. Like a personal trainer, they help you start a plan and stick with it.
2. If it’s needed, they will help you reorganize your debt and set up a debt management payment plan.
You deposit money with the credit counseling organization each month.
Your deposit is used to pay your credit card debt with a payment schedule that’s negotiated between you and your creditors.
Your creditors may also agree to lower your interest rates and waive certain fees.
Once the payment plan between the counselors and the creditors has been established, you will only have to make one payment per month to the counseling agency.
They will allocate your payment to your creditors. The normal set up fee for a Debt Management Plan is about $50, and the monthly maintenance approximately $25 or less.
A Debt Management Plan does not damage your credit score and may actually improve it over time!
How do I choose the right credit counselor for me?
A trustworthy organization should be willing to send you information about itself without asking you for personal details in return. If they do, this is a red flag and you should look elsewhere. Determine if the organization and their counselors are accredited and the qualifications of its credit counselors.
Look for a company that offers a range of services. National Debt Relief is a top rated debt relief company. They are BBB Accredited and have been in business since 2009 and helped over 500,000 customers get out of debt. If your debt load is $7,500 or more, might be a place to start.
If there are any fees get a price quote in writing. Although most credit counseling organizations are non-profits, credit counselors may charge fees for some of their services that they take out of the payments you make to them. If an organization won't help you because you can't afford to pay, look elsewhere. Finally, don't sign anything without reading it first and make sure all verbal promises are verified in writing.
Option 2: Debt Settlement
If you can't afford your lower monthly payment with credit counseling then debt settlement may be an option. Make sure you do your homework. Fees for this service vary considerably from one company to another.
The objective of debt settlement is to satisfy your creditors with less than what you owe and save some money along the way.
There are several reasons people choose a debt settlement company. Their debts are too high for them to pay them back in full and they don’t want to declare bankruptcy.
When a lender forgives part of a debt, it ends up on your credit report and it stays there for seven years. As years go by, though, your score will improve!
Taxes
Debt settlement involves income taxes. Some companies send out 1099-MISCs for the different between the payoff amount and the actual amount owed. That difference is considered earned income and be claimed on that year's taxes. It is important you consult your tax advisor for more specific information.
Let’s say you paid off a $4,000 debt for $2,500. The remaining $1,500 may be considered earned income even though you didn’t earn it.
Credit Counseling vs. Debt Settlement
Non-Profit Credit Counselors
Offer services free of charge.
Connect consumers with free resources.
Create realistic, sustainable action plans.
Act as a trusted third party on behalf of a consumer.
Implement plans that do not damage consumer credit.
Debt Settlement Firms
Ask for upfront fees.
Rely on slick marketing campaigns.
Promise to achieve unrealistic results.
Pretend to have “relationships” with creditors.
Are likely to hurt a consumer’s credit score
Option 3: Debt Consolidation Loan
For some homeowners a debt consolidation loan may be a way to get out of debt.
There are several questions you must ask yourself. How much equity do I currently have in my home? What is my current mortgage interest rate? What is the present value of my home?
The final, and probably most important question is: If I have trouble paying my credit card debt now, will consolidating it with the security of my home be a risk I should take.
SHOULD YOU RAISE THE WHITE FLAG?
Charged-Off Accounts
What happens if you don’t make your regularly scheduled credit card payments when they’re due? If you stop paying altogether, or make payments below the required minimum, the credit card company will actively try to collect. If they are unsuccessful and you haven’t paid them anything for at least six months, your unpaid balance will be considered a business loss to them and be “charged-off.” Federal rules say creditors must charge-off credit card accounts after six months of non-payment. A charge-off does not mean an entire write-off of the debt. A charge-off can mean serious consequences to your credit and ability to borrow in the future.
After they charge off the outstanding balance some creditors may still try to collect. If your creditor continues to try to collect it is more likely to work with you. Try to be open about your situation. The fact that your creditors have stopped calling doesn't mean they’ve forgotten about you.
The creditor can also sell your debt to collection agencies at a discount. The collection agencies pick up where your creditors left off. They assume that some borrowers will pay up and they will make money. All of this is perfectly legal.
The Fair Debt Collection Practices Act stops debt collectors from using certain “abusive and deceptive” actions. The limit on collection efforts is 4 to 5 years from date of your last payment, depending where you live. Contact the Office of the Attorney General in your state to find out about the statute of limitations.
If the time limit to sue you that is set by the statute of limitations has expired, the case can be dismissed. It is important to note that if the statute of limitations hasn't expired, and you pay something on your charged-off it may restart the collection agency’s clock, so give this a lot of thought prior to making any payment. If you pay the debt balance in full, however, your credit report will be updated to reflect this.
What if your debt has expired under this statute of limitations and a collection agency still calls you?
Explain you believe the debt to be legally uncollectible and you have no plan to pay it.
You will pay it only if you are taken to court and a judgment is delivered against you.
Put your argument in writing and request that the agency stop contacting you.
Under The Federal Fair Debt Collection Practices Act, if the statute of limitations has expired, once the collection agency receives your letter it can only contact you to say there will be no further contact.