Debt problems and solutions

Need Help Managing Your Debt? Choose the Right Solution for You.

This is our second post in a series on managing debt challenges. As covered in our first post, Debt Problems? Work With Your Creditors First, your best bet, should you find yourself in this situation, can be in working directly with your creditors. If that doesn’t alleviate your particular challenge, there are other options you can pursue.

As one example, there are a staggering number of companies in today’s marketplace offering to help consumers get out of debt with a variety of services. However, according to the Consumer Financial Protection Bureau and other consumer organizations, dishonest debt-relief providers have made consumers wary1,even as they seek solutions. But, what should the average consumer look for in solutions to aid them in addressing their debt relief dilemma?

Credit counseling? Debt settlement? Is there a difference?

There’s actually a big difference. Credit counseling offers more of a long-term approach to resolving debt issues. Credit counselors typically charge a monthly fee for their services. They work with consumers and their creditors to establish a Debt Management Plan (DMP) to pay off bills over a specified number of years. In return, creditors often agree to reduce or eliminate interest rates or accept smaller monthly payments from consumers working with credit counseling services. These consumers are also normally required to attend classes to gain the skills they need in order to avoid creating debt issues in the future.

Debt settlement delivers a shorter-term solution, but such services can present a riskier option. With debt settlement, consumers generally pay a lump sum based on the amount of the debt, and the provider promises to work with the consumer’s creditors to negotiate a reduced one-time payoff amount. However, creditors can refuse to work with these companies, leaving your debt completely or partially unsettled. Debt settlement companies also ask you to not make payments against the debts they are working to settle. That exposes you to fees that can add up while they are trying to settle your debt, creating bigger overall debt. Also, delays in reaching a settlement with creditors can damage your credit score if you are not making minimum payments to your accounts on time while waiting for the settlement outcome.

Additionally, It’s important to select not only the right solution but also the right provider. Do a little research up front and take the time to define your situation as well as your goals and timeline.

 

Questions you should consider asking before choosing a provider

  • What services are offered? — You might want to look for an organization that offers credit counseling as well as debt settlement. Providers that offer only one option may not be able to help with your particular situation.
  • Do they offer helpful information so you can better understand your options? — Providers should give you information about their services freely, without requiring anything from you. It’s also important that they offer to provide budgeting and money management information and guidance in addition to enrolling you in their program.
  • What are the set-up and/or monthly fees? — Get a specific price quote in writing. A typical set-up fee is $10.2 Beware of agencies that charge large up-front fees to be sure that you’ll receive the services you’re paying for. Try to make sure any fees make sense against your debt and for your particular situation. Avoid providers that charge for information that can educate you on your situation.
  • What if I can’t afford to pay the related fees? — If an organization won’t help you because you can’t afford to pay, look into other companies.
  • Will I need a formal written agreement or contract? — Make sure all verbal promises are in writing, and be careful not to sign anything without reading it first.
  • Are the counselors accredited/certified? — Legitimate credit counseling firms are affiliated with the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). Debt settlement companies should be accredited by The Association of Settlement Companies (TASC).

 

Based on your research, list a couple of agencies with which you might want to do business, and check them out with organizations like the Better Business Bureau (BBB) before making a final decision. Dealing with debt can be complicated and require that you do your homework, but it’s worth the effort, and it will have a positive effect on your overall debt and peace of mind.

 

1http://www.debt.org/2013/06/13/dishonest-debt-relief-companies/

2http://www.usa.gov/topics/money/credit/debt/out-of-control.shtml

 

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