If you visited the last post Part 1: Why Americans are in so much debt & ways to handle it we talked about the lending path and how that impacts your ability to clear debt and your overall effect to your debt situation. The ideal course of action if you are someone that has already accumulated a large amount of debt is to look at ways to help you clear it as quickly as possible. Your credit rating can repair itself in a matter of months if you are actively getting debt off your report. It’s really based off how much money you have available. These next 2 options that we will discuss allow you to actually clear your debt as quickly as you possibly can (short of a bankruptcy) with the money that you have available so you are not overextended while doing so.
These options are called relief plans. To touch on what the purpose is and some similarities, these are meant for anyone this is in a financial hardship. If you are just making the minimum payments on your debt, if you have been paying on your debt but then the interest is so high that you can’t get the debt balances to drop much or at all, or even if you were behind on your debt, these options are meant for those situations.
If you are not in any of these positions then there are other options that you may be qualified for to help you get your debt cleared quickly. However, if you feel that this is something you are dealing with and have income to put towards the debt that you have (maybe not enough for what the creditors are asking of you, but income outside of your normal bills) then these programs are ideal for you.
To explain the two in its simplest form, they are consolidation plans meant to negotiate with your creditors to find a more effective payment option so you can clear your debt faster. Each plan does that.Each plan closes out the accounts once you enter into the plan. That is where the similarities stop. Finding the right one for you really comes down to comfort level and preference.
Debt Management (also goes by Credit Counseling)
Pros
This program is the less aggressive of the two plans, meant to help you clear your accounts in a 5 - 7 year period. Now, there is usually no early payoff penalty with that plan but more often than not it takes that long. The idea behind that plan is to negotiate on the interest rates that you have on your accounts.
It mostly works with credit cards but some companies are able to take on some unsecured loans as well. These accounts have to be active, and typically no more than 90 days past due. This is a viable option for people because it’s meant to lower the accounts that have high interest where a large portion of your money is being wasted. Because it lowers the interest, now more of your money is hitting on the principal and you are now able to clear your debts faster.
Because you are making on time payments to the creditors, this program has less impact on your credit than a debt resolution plan, and certainly less than a bankruptcy. So if you have qualifying debt and income to support it, this may be a program for you.
Negatives
This really is relative to where your situation is because if you were someone that was going to consider bankruptcy then all of this is positive. Lol
But if you are someone that is newly into your search or just now realized while reading that you maybe qualified for a financial hardship program then understand these things moving forward....Credit Counseling is not meant to help you save money monthly. Not to say that you can’t save money, but the focus on this plan is to help you reduce your interest (which helps you save overall) and because the program is designed to clear your debt in 5 - 7 years then you are in a lot of situations still paying the same amount you would be paying monthly and sometimes more.
With Credit Counseling it is a hardship plan, and it’s meant help you manage the debt more effectively so you can get out of debt sooner. So as we talked about, you will have to relinquish the cards. Also, this program is regulated by the financial institutions so it is something certain cards or companies may not be eligible for, which means you may still have to pay for certain cards outside of consolidation.
The other facet with the program being regulated by the financial institutions is that it will show on your credit report that you are receiving assistance. This is treated like a soft chapter 13 bankruptcy to financial institutions. What that means is while you are within that program it takes you out of certain qualifications for new lending, especially a mortgage. You would have to wait until you have paid off the program.
Debt Resolution(also goes by Debt Settlement)
Pros
This plan moves fast and aggressively. Most people finish around 2 - 4 years no matter how much debt they have. It’s able to do this because within this consolidation plan you are having your principal savings reduced and most importantly your interest is being eliminated completely.
Extremely helpful since interest can accrue on a monthly, sometimes even on a daily basis. With no longer being responsible for that interest, you can actually pocket that money and save.
As you can imagine, this program is helpful for saving money. That is the biggest benefit for people because often times if you are in a tight position financially you maybe living check to check or only able to make minimum payments. When that happens, it takes so much longer to clear your debt with the interest attached in addition to if something happens like an emergency it would only be a matter of time until you are then falling behind on your debts.
Negatives
Because this plan moves aggressively and provides a significant savings you are going to have some negatives associated with this. Same as before you are going to relinquish the cards. Every other negative is on a case by case basis not everyone’s situation will be the same.
Also your credit will be affected, especially in the beginning of this process. You are defaulting on the payments if you haven’t done so already and that’s a necessary part of the process. This is how the credit is affected.
Now because you are defaulting on your accounts the creditors can reserve the right to file a civil suit against you. Rarely do those take place and especially end up in court because the creditors prefer not to involve the courts so they don’t accrue more cost on their own as well.
If you bank with any of the creditors you may want to consider moving your money because some institutions will have set off rights which can take money out of a checking or savings account that you have with them to offset you defaulting.
Lastly, the creditor can reserve the right to issue a 1099 C form to you as a write off to say they gifted you the savings you received. In other words you may be liable to pay taxes on that’s savings you receive. Not every creditor will send you one and there is no guarantee that you will experience this at all. If you did receive one you maybe eligible to have this removed as taxable income with a tax form 982 documented on its website. Consult your tax professional if you are unsure of this form.
Disclaimer I am not a tax professional!
Now that we covered these two relief options in detail, you have a little more info to work with when it comes to handling your debt. Each process is going to have a cause and effect associated with it, but they will help you save and clear your debt as quickly as you can clear it, and the last thing you want to do is still be in a position where you are overwhelmed, overextended, and eventually overexposed financially.
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