What Debt Reduction Services Are Available?
Paying off Debt with a Debt Elimination Program
Aug 26, 2009
There are several debt reduction services that are designed to reduce the amount owed on loans, medical bills and credit cards. Many Americans spend vastly more than they earn. Unless this problem is tackled with a debt elimination program, financial difficulties can continue indefinitely with serious ramifications for personal health and mental well-being.
The May 2009 U.S. Congress' Joint Economic Committee, "Vicious Cycle: How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the Recovery", said that revolving consumer debt amounted to $950 billion in the fourth quarter of 2008. A total of 13.9% of all disposable income went towards servicing debt. It is important to remember that this figure is only an average and fails to take into account the millions of U.S. citizens who don't owe any money.
Debt Reduction Services
It is possible to reduce a debt-to-income ratio with a debt settlement program, Debt Management Plan or by declaring personal bankruptcy under chapter 7 or 13. Whilst paying off debt can take years to achieve, continuing to make interest payments on credit card debt is not sensible due to the absence of a defined term. A debt elimination program will have negative repercussions for personal FICO credit scores.
Declare Personal Bankruptcy
Filing under chapter 7 (liquidation bankruptcy) could help someone to become debt-free in just 4 to 6 months. Since the bankruptcy laws were reformed in 2005, the debtor's income will need to be below the state median. It will also be expected to hand over any non-exempt assets (valuable collections, sports car etc) to a trustee in order that they can be sold to pay-off creditors.
A number of people are either unable to comply with the state income rules or don't want to lose their non-exempt assets. However, it remains possible to declare personal bankruptcy under chapter 13 (reorganization bankruptcy). This will involve paying off debt over a 3 to 5 years period.
Debt Management Plans
This is a gradual debt reduction service based upon making an affordable monthly repayment to an intermediary who disseminates the proceeds to creditors on a pro rata basis. An account manager will analyse their client's finances to see what they can afford to offer.
Whilst this debt elimination program doesn't write-off debt, it may be possible to freeze further charges and interest payments. It can take a number of years to fully clear the amount owed, but an account manager will deal with collection agency enquiries throughout the entirety of the arrangement.
Debt Settlement Programs
Unlike a Debt Management Plan, this debt reduction service aims to clear up to 50% of the amount owed. Paying off debt is possible over a period of 12 to 36 months. Specific details of all credit obligations and a breakdown of income and expenditure will be necessary to assist with any calculations.
Avoid debt settlement programs where charges are paid in advance. Management charges should be taken on a monthly basis to avoid problems occurring in the future. Whilst there are several cowboy operations, there are a number of genuine providers who will help a debtor to overcome any financial difficulties.
It is important to perform research before signing-up to a debt reduction service. Making the right choice will give the debtor a better chance of making it through to the final payment. For this reason, it is important to consult a qualified credit counselor before proceeding with a debt elimination program.
Sources
CreditCards.com
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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