The consequences of the economic downturn have been dire for many consumers. Foreclosure, lay offs and market losses have created a devastating perfect storm for the consumer. With American credit card debt levels racing beyond $970 billion (As of 2008, Nilson Report 4/09) and the average household debt level exceeding income by 40% (in 2007, US Joint Committee for Unfair Credit Card Practices), many consumers are desperately seeking solutions for their credit card debt. This article examines several of the most popular debt relief solutions.
Minimum Payment = Maximum Debt
As the economy weakens, many consumers skip the standard payment plan for credit card debt and opt to pay only the minimum payment required. This is one of the quickest ways to maximum debt. Paying more than the minimum payment is essential to start the path out of debt. The minimum payment is predominantly interest and allows for no reduction in the principal.
Making this solution work requires a commitment to a significant payment each month. While this solution helps to restore credit ratings, it takes time and will require that heavy payment each month to end the debt cycle.
Pay attention to payment fees, late charges and other service fees that may impact the success of this solution. Set a fixed date for payment, set a committed payment amount and stick to the plan.
Software Solutions
Using sophisticated software to calculate the best payment plans, the software debt pay down solution can aid the consumer in assessing the best payment strategy for the combination of debt to income ratio.
Taking into account all the bills, monthly living expenses, fluctuations in payment and income the debt pay down plan will create a customized payment plan and debt relief strategy.
This allows the consumer to payback all the debt, find any potential savings by the creating the right balance of payment to interest rate and type of debt and create a better credit rating from this progressive schedule of debt repayment.
Again, this will take time, commitment and will require the consumer to use the strategy to reap any benefit.
Ask the Expert
Millions of Americans choose to use a credit counselor for debt relief. This solution requires the consumer to fully commit their debt to the counseling firm or counselor.
In some cases all current options for credit will be terminated, a contract or commitment may be required and the counselor will then negotiate with all the creditors and will manage the payment strategy.
In many cases, the credit counseling firm may have preferred rates with creditors which create a more advantageous payment process than the consumer would be able to negotiate on their own.
In addition to finding a lower interest rate, lowering monthly payments and eliminating the harassment of collection agents, the credit counselor will coach and mentor the consumers as to the cause of debt and future planning strategies to reduce the occurrence of future debt. Classes, workshops and financial planning strategies are often part of the credit counseling process.
This solution results in complete payback of debt including interest but reduces the pain and hassle of managing the process of debt relief. There will be negative effects on credit ratings, but far less damaging or lasting than some of the next solutions.
Settling for Debt Relief
Debt settlement looks on the surface like an easy solution to debt relief. Essentially, the consumer hires a profession debt relief expert to negotiate with creditors for payment strategies, payoff reductions and other debt relief solutions.
The negotiator looks for as many ways as possible to reduce the debt to pennies on the dollar from the current debt level. The process may save 50% or more.
But all is not golden with the solution; there is significant negative impact on the credit rating as there is a reduction in payback. The aggressive collection calls, letters and hassle are not likely to decrease, and in fact since often a significant portion of the debt will not be paid back, the collection agents may increase in hostility.
While this does not have the public nature that bankruptcy bears with it. The process is still a painful and negative period until the negotiations are complete. The reputation and ethics of the negotiator are critical to the success of the process. Since many of the negotiations will involve payouts, it will require the accumulation of enough money to cover the negotiated total. The negotiation company may take payments until the total is accumulated, the negotiation company will also take fees prior to settling the debt. All of the fees need to be included in the calculation of whether this is the best solution.
Bankruptcy
The big white elephant in the room is bankruptcy. The rampant rise in bankruptcy in America has resulted in bankruptcy reform laws that are largely not in favor of the consumer.
Chapter 7, which is the complete clearing of debt, now requires extensive qualifying. The Chapter 7 bankruptcy allows for a fresh start from the debt and a chance for the consumer to rebuild their credit rating. Since creditors do not get paid in this process, they have lobbied to make this a more difficult option to achieve.
Chapter 13 is a reorganizing of the debt. The judge will determine the priority of payment and eliminates interest from the payback amount.
Both bankruptcy options are long lasting debt relief options, they stay on the consumer’s financial records for seven to ten years. The bankruptcy process is an extremely public process and will prevent some credit options in the future and may impact other areas such as job selection and immigration status.
Conclusion
Any debt relief solution is a serious decision, with some more damaging than others. It is important for the consumer to do the appropriate research into each solution, to determine what fits their situation best.
