What is the Best Debt Solution for Me?

What is the Best Debt Solution for Me?

There’s only one way to get into debt: You spent more than you could pay back. Now you’re paying interest and maybe even worse! We’re talking steep penalties and painful fees. Luckily, there are several ways to get OUT of debt, and while each of them has its own pros and cons, there’s a good chance one is a perfect fit for you.

Consolidated Credit

My name is Doris Baker, and I work with Consolidated Credit, one of the nation’s oldest and largest nonprofit credit counseling agencies. In a moment, we’re going to review the most popular and proven debt options available to you. But you’re sure to have questions. If we can’t answer them today, you can call one of our certified credit counselors for a free debt analysis. We’ll tell you how to do that at the end of today’s presentation.

Which is the perfect debt solution for you?

here are four proven ways to get out of debt safely and reliably. They are: do it yourself, debt management, debt settlement, and bankruptcy. The first one is the hardest, so we’ll talk about that first. Then we’ll dive into the three easiest and most popular solutions. Why are they so popular? Because you have experts helping you, instead of going it alone.

Do-it-Yourself (DIY)

If you’re buried under heavy credit card balances that you can never seem to pay off, part of the problem is the steep interest rates most credit cards charge. The national average is almost 20 percent, which means for every $5 you pay to get rid of that big balance, a dollar is being siphoned off and going to your credit card issuer as their profit. That makes it tough to ever catch up. But what if you could get a credit card that would help you pay off your credit cards?

Balance transfer cards

A certain kind of credit card can help you. It’s called a balance transfer card. These cards offer you a low-interest rate, and in many cases, no interest rate at all. With one of these cards, more of your money goes to paying down your balances instead of lining the pockets of your credit card issuer. Sound too good to be true? They’re not, but there are some drawbacks you need to watch out for.

Specifically, there are three things to watch out for. First, most balance transfer cards charge a fee to move your balances from your other, higher-interest cards. This can total up to 5 percent of every dollar you transfer. While some charge less and a few don’t charge anything, you need to keep your eyes peeled for this annoying fee. 

Finally, balance transfer cards aren’t for everyone. I mean that literally. Some folks can’t get them, because the credit card issuers won’t give them one. If your credit score is under 670, you’ll generally struggle to get approved. Why? Because you’ve already proven to be a credit risk, and even though credit card issuers want to make money off you, they also want to get paid. So if your credit score is suffering, this isn’t the option for you. So let’s move onto DIY option number two.

Debt consolidation loan

Next up on the scale of difficulty is a debt consolidation loan. This is simply a personal loan you secure and then use to pay off all your credit card bills with steep interest rates. The concept is the same as a balance transfer card: You’re paying off the high-interest rates with a lower one. In this case, you might be able to get a personal loan of between 36 and 60 months from your bank or credit union at 6 percent, then use the money to pay off your credit cards that are charging you 20 percent. Then you simply make one monthly payment on the personal loan. Usually, you get out of debt faster AND make a smaller monthly payment, which is the definition of a win-win.

If you get a debt consolidation loan, you’re looking at 3-5 years to pay it all off. In the meantime, you need to be careful not to run up more debt. That timeline is pretty close to a debt management program, which we’ll talk about in a few minutes, but in that case, you work with a credit counseling agency that can help keep you on the straight and narrow. With a debt consolidation loan, you’re on your own – if you can even get a loan. If you have too much debt, it’s a classic Catch 22. You need the loan to pay off debts, but you have so much debt, no bank or credit union will give you the loan. 

Getting expert help

OK, not everyone renovates their own bathrooms or overhauls the transmission in their cars. Most of us rely on experts to help us do everything from our taxes to our oil changes. Well, it’s no different with debt. Before we dive into what these expert debt solutions are, let’s spend a minute talking about how to find the right expert. 
Just like there are terrible CPAs and auto mechanics out there, so too, are there terrible debt experts. So here’s what to look for. First, go to the website for the Better Business Bureau and search the name of the company. If it doesn’t have an A-plus rating, forget about it. Second, go to the agency’s “about” page and see how long it’s been around. The longer the better, because that means they know their stuff backward and forward. Third, check out review sites that have excellent customer reviews for the agency, like Trustpilot.com and consumeraffairs.com.

OK, let’s talk about what these experts can do for you. We’re going to tackle them from the simplest to the most complicated. We’ll also tell you what kind of person each one is best for. That’s because each one has its pros and cons. Once you know those, it’s relatively easy to figure out the right solution. 

Debt management program

One of the most powerful debt-busting solutions is only available through a credit counseling agency like Consolidated Credit. It’s called a Debt Management Program, or a DMP for short. It might be able to cut your monthly payments by up to 30 or even 50 percent. A DMP also freezes late fees. Even better, you only make one payment a month for all the credit cards that are in the program. And unlike the other debt solutions we’ll talk about later, your credit score isn’t irreparably damaged. It might dip temporarily, but it actually improves over time. Unfortunately, credit card companies won’t let you sign up for a DMP yourself. 

To qualify for a DMP, you have to work through a credit counseling agency, because the credit card companies trust those nonprofits to follow all the rules they establish. After all, the credit card companies are willing to forgo some of what you owe them to get back the rest. They don’t surrender profits that easily. Luckily, when you work with a reputable credit counseling agency, they take care of the paperwork for you. So in a way, this con becomes a pro.

DMPs aren’t for impatient people. It often takes years to graduate into financial freedom. One reason for the long timeline is that DMPs are supposed to be relatively painless. Imagine a crash diet compared to gradual lifestyle changes that help you lose weight. That’s how a DMP helps you shed debt. And your credit counselor is there for you the entire way. But if you’re looking for a quick fix, this isn’t it. Then again, quick fixes come with their own problems, as we’ll see in a few minutes.

Debt settlement

Debt settlement is the next step up in both results and complexity. Debt settlement seems like the best option of them all. In a nutshell, you negotiate with your creditors and pay them only a fraction of what you owe. Why would your creditors agree to this? Because they don’t want you going broke and paying nothing. The national average over the past few years is 48 percent – which means most folks in debt settlement don’t pay back 52 percent of their debts. Sounds like a great deal, right? Sadly, it’s not. Because debt settlement is now being advertised so widely, it’s worth spending a few moments reviewing the three major downsides.

Debt settlement starts out with a free debt analysis to see if it’s the right solution for you. If it is, the debt settlement company will set up an escrow account for you. This is a secure account where your funds will be kept until your settlements are reached. That can take awhile, and in the meantime, you’re making monthly contributions to the escrow account. The more creditors you have, the longer this process can take. And some creditors might outright refuse to settle. After all that, the debt settlement company will take its fee out of what you’ve paid into escrow. 

One thing about debt settlement ISN’T confusing: It definitely ruins your credit score. And why not? You’re telling your creditors you can’t pay them back what you owe. New lenders will be wary of giving you money, because they fear you’ll do the same thing to them. Now, if you’re buried in debt, this might seem like a small price to pay for getting rid of those steep balances. But that negative mark on your credit can stay there for seven years. That means if you want to buy a home or a car, you’ll pay a lot more in interest – if you can even get the loan at all. 

The most dangerous part of debt settlement has nothing to do with actual debt settlement. It’s the scammers who try to steal your money. Some try to charge steep fees up front, which is actually illegal. By law, debt settlement companies can’t charge any fees until a settlement is successfully achieved. And those fees should be a small percentage of the original amount you owe. Whether you go debt settlement or debt management, you’ll pay a fee to the folks who are handling the work for you, but it should be much, much less than what you’re saving. Unscrupulous debt settlement companies don’t care about that, though. Some will even take your money and then not actually help you settle your debts. So you should seek out a reputable debt settlement firm using the same techniques we described earlier for credit counseling agencies.

Bankruptcy

Now let’s talk about bankruptcy. Among all the terms we’ve discussed today, this is often the only one most folks have heard before. But it’s also one of the least understood. Most people know bankruptcy is serious, but they don’t always know why. Let’s spend just a couple minutes giving you the broad overview. But remember, entire books have been written about bankruptcy.

Bankruptcy can accomplish things no other debt solution can. Bankruptcy can help save your home from foreclosure and get you out of crushing credit card or medical debt. Because bankruptcy is a law, it has powerful advantages over debt settlement. For example, just filing for bankruptcy means you get an “automatic stay.” That prevents creditors from pursuing payment or taking any action against you until your bankruptcy is discharged or a repayment plan has been approved. Also, bankruptcy works for back taxes, something no other debt solution does. In a nutshell, bankruptcy is a debt solution where the power of the legal system is behind you.

Of course, because this is the legal system, it’s even more complicated than debt settlement. You’ve probably heard of Chapter 7 and Chapter 13 bankruptcies, but do you know the difference? Chapter 7 is called “liquidation bankruptcy” because it involves selling your assets, although some are protected, like your home and car. Chapter 7 bankruptcy only takes 4-6 months. Chapter 13 is similar to a debt settlement program because it sets up a monthly plan to pay back a percentage of your debts. The biggest difference is that the terms of Chapter 13 bankruptcy are decided by the courts, not negotiated between you and your lender or creditor. Depending on this payment plan, it could take up to 5 years to complete the court-ordered repayment plan. This is commonly called “wage-earner bankruptcy,” and it can be a good option if your creditors don’t want to work with you on debt settlement.

Regardless of which option is best for you, you’re required to go through something called “pre-bankruptcy credit counseling.” It’s up to you to find an agency approved by the Department of Justice, and a typical session can take up to 90 minutes. Bottom line, it takes time and effort.

Just like debt settlement, there’s a black mark on your credit for years to come. For Chapter 7, that bankruptcy will stay on your credit report for a decade. For Chapter 13, it’s less — seven years. That’s because you’re actually paying back some of your debts. Still, that’s a long time to have a low credit score. 

If you have student loans—and the national average is around $37,000—you probably won’t be able to get rid of them in bankruptcy. Bankruptcy law puts the burden of proof on you. You must show that continuing to owe those loans “will impose an undue hardship on you and your dependents.” Proving that is tough. One study shows that only one-tenth of one percent of all bankruptcy filers have enough evidence to even try to meet this threshold—and only 40 percent of them succeed. So the bottom line is, while you CAN get student loans discharged, you shouldn’t count on it.

What should you do?

There’s really no downside to calling for a free debt analysis. There’s no obligation, and a certified credit counselor can walk you through all your options, which means you have more information to make your debt-busting decision. Let’s face it, this webinar is an overview, not a deep dive into your personal situation. But you can get that with one free phone to a nonprofit agency. I really recommend it.

So that’s it. If you have any questions, I’m happy to answer them. And if you want our number, it’s on the screen. You can call us for one of those free debt analyses I’ve been talking about. Thanks for your time today!