What are we supposed to do when we experience financial difficulties? If simple changes to the budget or the liquidation of assets doesn’t resolve the problem where can we turn? We see the advertisements on TV and the Internet offering solutions but we have also read the horror stories of con-artists and less than scrupulous companies taking advantage of others in our situation, so who can we trust? We are moral and ethical borrowers and we want to live up to our obligations but the creditors don’t seem to want to help, is my only option left Bankruptcy?
When we experience a major financial setback we suddenly find ourselves entering a phase of life we were never instructed on how to handle. First we turn to our support system; family, church and work, trying to find advice and assistance. Unfortunately, they are just as un-informed, or also struggling, so we have to look for businesses or services outside of our sphere of trust.
In that search you will find that there are really only 3 ways to deal with debt when all other options have failed: Bankruptcy, Credit Counseling, or Debt Settlement. Call on any of these and, of course, they are the best option. They are, however, in business to sell their service so it makes sense they will promote it over the others. They will tell you how their option saves you the most in interest, or does the least damage to your credit, or costs you the least to repay. They will tell you want you want to hear and not necessarily what is best for your situation. You see, it is not so much what they promise you or how much they will charge you that should be your deciding factor. Instead you choice should be based upon how delinquent you are, what assets you have, or may have in the near future, and if there is any pending legal action. Just like GRIEF has stages so does DEBT and which service you use will depend on what stage you are in.
Stage #1 Trouble on the Horizon
We have all been there – that instant when we realize that we are in, or are about to be in, financial trouble. Work has been threatening layoffs, credit card balances are reaching their limits, a sudden illness or injury occurs, and so on. What do you do? First you may start by looking at your budget; maybe you can cut back on your spending or increase your income to free up the needed money. Chances are you may have already done this and there is no place left to cut. Then you may try calling your creditors or other lenders to see if you can refinance the debt to make it more affordable. Chances are your existing creditors won’t be that helpful. Especially when you are current on your debts. So without excellent credit and/or collateral new lenders won’t want to take the chance. Now what?
This is the time when it is best to seek the help of a Credit Counselor. A Credit Counseling Agency is a non-profit company that offers free financial advice regarding the options available to deal with debt. It can help to have an independent, experienced pair of eyes review your overall financial situation to discuss the paths you may not have considered. The credit counselor will also discuss their option which is called a debt management plan. This is a structured, negotiated, repayment plan that will help reduce your monthly payments and interest rates, on your unsecured debts, making repayment more affordable. In order for this plan to work through your financial problem(s) have to have stabilized. You have to be able to afford your living expenses as well as some amount for debt repayment. If this is possible then the Credit Counseling Agency will put you on a debt management plan. You will make monthly payments to that agency and they will disburse the funds to your creditors to keep the arrangements they negotiated on your behalf. On the plus side the agency will help you repay your debt, for less, within your budget, without tarnishing your credit so that you are in good standing when you are paid in full. On the negative side, all of your accounts will be closed so that you can’t continue to add to the debt and you may have a slight ding on your credit standing when you first start as there is a transition from you paying your debts to the agency paying them.
If the financial problem has not stabilized and you can’t afford the repayment plan then you, unfortunately, will be moving on to the next stage.
Stage #2: Going Down the Drain
At this stage you are not meeting your monthly obligations. The downward slide has begun and the financial stress levels have increased. Payments are made later and later, if made at all. Your accounts are delinquent and the collection calls and letters have begun. This stage takes approximately six months before permanent damage to your credit occurs, depending on the type of debts you have. By now every non-essential expense should have been cut and all non-essential spending should have been stopped, if that has not occurred then please realize you are only making it harder on yourself to dig out. You hopefully are meeting your basic living expenses, but even that may a struggle.
At this stage you have two choices for third party assistance. If you have hit the bottom and your financial situation is improving, and you can now afford some kind of repayment, then revisit the Credit Counseling Agency. As long as your accounts have not “charged-off” (generally after 180 days of delinquency) the credit counselor should be able to set up a plan that will get you back on track with your debts and salvage your credit standing.
If during this stage you come into some kind of windfall; you win the lottery, a rich relative offers to help, etc., then visiting a Debt Settlement Agency is a viable option. A Debt Settlement Agency, often confused with the Debt Management Plan offered by Credit Counselors, is usually a for profit agency or attorney that negotiates on a consumer’s behalf with their creditors to accept less than the balance due as payment in full. The fee charged is usually a percentage of the debt, running into the thousands, but can’t be incurred until the settlements have been agreed to and repayment started. Be wary when contacting these types of services as many over-promise what they can accomplish. They CANNOT stop collection activity, they CANNOT stop legal action, they CANNOT stop interest or other fees, they CANNOT improve your credit and they CANNOT guarantee that your creditors will agree to a settlement at all. The services they are providing is something you can do for free on your own, but like taxes and legal matters, it is probably better to pay a professional. Be aware that there may be tax implications with a successful settlement. If the amount the creditor writes off is greater than $600.00 they are required to submit to the IRS the amount forgiven. You may then have to pay personal income tax on that amount as the IRS views it as income earned that year. To find if you are talking to a reputable agency contact the BBB as well as your state’s Attorney General Office.
If your situation has still not turned around and you have not have not come into some kind of windfall then you will be moving into stage 3.
Stage #3: Point of No Return
By the time you have reached this stage it has been over 6 months since you have paid on your accounts and they are charging off. This is the point at which they can no longer be brought current; there is no improving your credit from this – short of paying the accounts off and waiting the 7 years for them to come off your report. Legal action, if not already taken, is most likely being threatened.
At this point you may be thinking Bankruptcy is your only option, but it is not. It really depends on if there is light at the end of the tunnel or not. All three services are viable depending on the actions being taken against you and your moral/ethical standing. Some people are just adamantly against filing Bankruptcy regardless of the circumstances. If you are one of those then a Credit Counseling Agency can help set up a repayment plan or a Debt Settlement Service can negotiate a settlement, if you have the funds available. Just understand that following those courses of action isn’t really going to help improve your credit standing and neither of these services can stop your creditors from taking legal action if they are inclined to do so. Generally, if a creditor agrees to an arrangement they will not proceed with legal action, but there is no guarantee and if that action has already been started it will be very difficult, if not impossible, to stop.
Most consumers’ fear or apprehension about Bankruptcy comes from a lack of knowledge about what it entails. Most attorneys will give a free initial consultation so use that to allay your fears and to increase your knowledge. The best advice is to shop around, as fees can vary widely, and to make sure to write your questions for the attorney down in advance of your meeting. Bankruptcy can stop all collection activity, can stop or delay foreclosures, evictions, disconnections and garnishments. These are all the things you are faced with at this stage and if allowed will only further hurt you situation.
So, next time you are faced with a financial problem think about what stage of debt you are in to decide what kind of help you need.