What can a person do when their debt becomes unmanageable?
By: Tom Thomas
Superior Debt Relief
March 13, 2009
Unless you are the US government, simply going deeper into debt is not an option. It would be nice if we all could continue borrowing with negative 10 trillion dollars in our bank account, but the rest of us have to live in reality. Oh, I suppose you could just pay the interest, which swallows up a quarter of this government’s income every year. This is the “do nothing” approach which won’t appeal to most people reading this article. Eventually, defaulting on the debt will be the only option. If you are paying out a quarter of your income to pay interest on your debt, then indeed, this may be your only option. But if the interest accounts for less than 4% of your income, there are more attractive debt relief options available.
The most common form of debt consolidation involves taking out one loan to pay off many others. Usually, a consolidation loan will require some sort of collateral to secure the money (your house, car, baseball card collection) which can be detrimental if the original debt was unsecured because at this point you are trading an unsecured debt for one that is secured by property. There are advantages: You only make one payment each month and this is (hopefully) at a reduced overall interest rate. This option is usually only available to those that have a good credit standing. Lenders are taking an especially close look at your financial situation at the present time, due to the world-wide lending freeze. Getting this loan can be very difficult (if not impossible) especially when banks are not only unwilling to lend to each other, let alone a consumer.
Credit Counseling involves working with the credit card companies to lower the interest rates. Sounds like a great deal. You will be able to save some money. But realize, these companies were all set up by the credit card companies in order to collect 100% of the debt plus interest (as much as possible). Unbeknownst to the general public counseling companies have a “fair share payout” agreement with the banks and credit card companies whereby they receive payouts based on how high they leave your interest rate – the less they lower your interest rate the more money they get. Keep in mind they never tell a prospective consumer about this relationship while they also charge a monthly fee to act in your best interests. Also, any debt they help you with will show as TPA (Third Party Assistance) on your credit report, which is, in the eyes of a lender, just as bad as bankruptcy!
Bankruptcy is a last resort. The credit card companies have lobbied in Congress to make this option as difficult as possible, and have been successful. Even if you qualify for bankruptcy protection, you will be forced to liquidate most of your assets to pay back your creditors, and with the new laws, even filing for bankruptcy is prohibitively expensive. Most consumers will tell you that the benefits versus long term damage and strife just aren’t worth it.
Then there is the “do nothing” approach favored by the US government. Unfortunately, you probably don’t make the laws and don’t have the capacity to tell your creditors to take a hike. Your creditors are NOT going to “do nothing”; they ARE going to make your life as difficult as possible. Ignoring your debt won’t make it go away, but will inevitably cause you more grief and stress.
The last option I want to discuss is debt settlement. This involves negotiating with the credit card companies to reduce your total debt load. Typically, you must hire a third party company to negotiate on your behalf, because creditors do not take a do-it-yourself client seriously and will attempt to make you enroll in their credit counseling program. (Sound familiar?) A debt settlement company works for you, not the creditor. Typically they can only negotiate credit card debt, but if you didn’t put up collateral for a debt, they can most likely negotiate. Industry standard is to relieve you of 50% of your total debt load in a period of less than 3 years. It is important to negotiate within this window, or the accounts will “go legal” and the settlements will be more difficult to achieve. You will take a hit on your credit rating during this process, but most of that damage can be reversed without a negative TPA appearing on your credit report. This option is a stop gap between debt consolidation (if you can manage to get the loan) and bankruptcy (if your debt situation is way too far gone). I do not recommend credit counseling; you are playing the creditor’s game and they will punish your credit rating anyway. Nor do I recommend the “do nothing” approach, for obvious reasons.