The Pros and Cons of Chapter 13, Credit Counseling, Consolidation Loans, Debt Settlement and Fiscal Fitness™
“Debt is like any other trap, easy enough to get into, but hard enough to get out of.”
-Henry Wheeler Shaw
Sometimes good people land in bad financial situations due to poor financial habits, or circumstances such as job loss, divorce, illness, death in the family, and so forth. They find themselves with seemingly unmanageable debt, sometimes accumulated over years, at other times, practically overnight, the result of a personal crisis or business loss:
A businessman who couldn’t get the funding he needed to complete an urgent business project when his business partner was hospitalized took out $200k in credit card draws on his excellent credit – right before his business partner died, the economy crashed, and sales went south.
Following a financially devastating battle with cancer which caused one woman and her husband to get a second mortgage, she discovered he had run up all of their credit cards. He had lost his job 6 months earlier, but unable to admit that to her, he kept up the charade of “leaving for work.” Meanwhile, he simply paid for expenses on credit. When he failed to make the minimum payments and creditors started calling, the gig was up. Her name was also on the credit cards, and she did not want to declare bankruptcy, so she got a second job.
Though the reasons and stories are many, these are not isolated cases. Debt has become an American epidemic. As of May 2011, US consumer debt totaled a whopping $2.43 trillion, according to creditcards.com. 177 million card credit card holders (over 70% of the population) report an average household credit card debt (per household with credit card debt) or $15,799. Bankruptcy filings are up a whopping 250% in the four short years from 2006 to 2010, with personal bankruptcies alone totaling over 1.5 million.
But what’s the solution? Debt settlement? A consolidation loan? Credit counseling? Chaper 7 or 13 bankruptcy? Or should you just keeping making minimum payments – if you can – and hope that things get better? I can’t determine what the right choice is for your situation, but I can show you the popular options, and help you take a look at the pros and cons:
Bankruptcy legally reduces or even erases debt, and it stops creditor harassment better than any other method. However, it will also severely affect your credit rating for many years to come. Bankruptcies will stay on your credit for 7-10 years, affecting your ability to buy a home, rent an apartment, purchase insurance, cars, or cell phones without high rates and fees, and – in some cases – even get a job.
Those with higher incomes (or homes in foreclosure they wish to keep) will be forced to file a chapter 13 bankruptcy, which takes 3-5 years, requires partial or full payment of debts, and forces the borrower to live on a strict bankruptcy-court-determined budget. Only about 35% of debtors complete their chapter 13 bankruptcies. The remainder default, and stand to lose homes and other assets to creditors.
Credit counseling programs offer some consumer education, but also negatively affect credit ratings (similar to a chapter 13 bankruptcy), but typically without the benefit of lowering balances. Interest rates and payments may only decline slightly, if at all, and most clients do not complete their programs. What seem like “small monthly payments” add up to thousands over time, and the fact that the agencies are generally paid by the creditors creates a conflict of interest when it comes time to negotiate for the borrower.
Because of the minimal benefit and how much it can impact your credit, you might consider negotiating with your creditors yourself if you only need a “little” help on your debt. Many creditors offer better deals to consumers than a credit counselor can negotiate, though you typically must be behind on your payments to be offered reductions in rate or payments.
Debt consolidation may lower interest rates or payments when a borrower consolidates (or pays off) several smaller debts with one large loan. However, it does nothing to lower the balances owed. (Actually, they will owe more because hefty loan fees are usually added.)
And qualifying for a debt consolidation loan can be tricky – if the consumer’s credit is not excellent, they will likely only qualify for terrible rates and/or a secured loan – secured by equity in a home, car, etc. This is risky business: if the borrower uses their home as collateral, they now risk foreclosure should they fall behind on payments. Loans from family members may be an option, but again, you must weigh the “what if” factor should you find yourself unable to make payments. Many a relationship has been lost over money… is it worth the risk?
Debt settlement is a way of negotiating your debts, especially, your balances so that debts can be settled for less than the original amount owed.
Some debt settlement companies have earned a bad name for taking borrowers’ cash, whether or not they could help them. Some have acted fraudulently, collecting money then disappearing. Other times, borrowers were inappropriate candidates for the program and did not have sufficient income for paying off negotiated debts, so they paid the debt settlement company, but could not pay their debts. (As in a chapter 13 bankruptcy, the debtor must have income over and above their basic necessities with which they can settle their debts).
However, the best debt settlement companies have approached an 80% success rate, with borrowers paying significantly less and getting out of debt faster than other methods. Credit ratings do suffer in the short term, but recover much faster than with bankruptcies.
When I see someone trapped in “revolving debt” (borrowing from one card to pay another), or falling further behind on their debt, I may suggest they investigate debt settlement. Even with – or especially with – high credit scores and faultless payment histories, people can still be trapped on a debt treadmill, with every spare dollar going to their creditors.
That’s no way to live.
I’m going to go out on a limb in this post and endorse a new Fiscal Fitness™ program that I believe will be a great fit for some people. It’s a “new, improved” version of debt settlement, and it combines some of the benefits of other methods, as well. While it is not for everyone, Fiscal Fitness™ can help clients:
- Get out of debt faster by reducing what they owe on consumer debt and even past-due utilities.
- Find workable solutions with their creditors.
- Get training and support to follow a budget and pay off debts.
- Establish healthy financial habits to create lasting wealth.
- Get quality one-on-one advice from a financial professional.
- Protect their income and assets with appropriate insurance.
- And, most importantly, get a fresh financial start… without a bankruptcy!
Who is Fiscal Fitness™ for? The program is ideal for someone who
- has $10,000 or more in unsecured debt (it won’t help with student loans, car loans, mortgages, or tax liens),
- cannot make reasonable progress on the debt as it now stands,
- is willing to compromise their credit history in the short term to become debt-free,
- wants to improve their financial habits and build wealth,
- has some income (above the bare necessities) to put towards debt, even if they are behind and cannot make minimum payments,
- and is motivated to avoid bankruptcy.
Are you or someone you know fighting a losing battle with debt? Perhaps Fiscal Fitness™ can help! Please refer to the website at FiscalFitnessJourney.com, or call 877-865-7111. You’ll be able to speak to a financial counselor who can help you determine if the program is right for you. (I’d like to hear your experience if you do!)
In conclusion: I can’t tell you what the “best” option is for you, but I can help you explore the pros and the cons of various scenarios. Too often, you find yourself consulting with someone who has an agenda – i.e., a bankruptcy lawyer who only profits if you choose bankruptcy. The only real way to make a choice is to research and consider all options in light of your particular situation, weighing not only the pros and the cons, but also, what “feels” right to you.
Ultimately, these are personal choices, not simply mathematical ones. For instance, you might be able to save money by doing some form of debt settlement, but if you have the money to pay the entire debt, you may simply feel that is the right thing to do. When your conscience and your calculator disagree, always follow your conscience. – KP
Kate Phillips helps people go from frustrated, fearful, and freaked out about money (feel free to add your own “F word” as it applies to money) to an experience of peace and prosperity. Learn more about Total Wealth Coaching, or find out more about our services.
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