Many people who are drowning in credit card debt will often turn to debt settlement programs or speak with a credit counselor. Choosing the right type of program is critical in determining how successful you’ll be in completing the program. Nowadays, you will see numerous of commercials on the TV/Radio soliciting debt relief services. So how do you know which one is right for you?
I know there seems to be a lot of negativity towards debt settlement companies. With all these unscrupulous players in the industry, the industry has no one but themselves to blame! However, debt settlement is certainly an effective approach in paying off your debts.
• Little or No Assets- One of the biggest dangers of debt settlement is the possibility of creditors suing you. There are some creditors who are more likely to sue you than others (Capital One and Discover), but it doesn’t rule out the other creditors from suing you. If you have very little assets, even if a creditor wins a judgment against you they won’t be able to attach a lien against your personal property.
• Amount of Income- This is an extension of the aforementioned. Creditors will also be able to garnish your wages if they win a judgment in court. However, there are state and federal guidelines that limit the amount they can garnish. In certain cases, creditors won’t be able to garnish your paycheck if it’s below a specific dollar amount. Anyone who is also on SSI/Pension cannot be garnished as well.
• 3+ Months Behind- Anyone who has fallen behind should strongly consider negotiating with their creditors. Creditors are more inclined to work with delinquent accounts and give special attention to accounts that are severely past due.
• Ability to complete program <36 months- There are some companies who try to entice you with low payments by enrolling you in 48+month plans. In all honesty, if you need to enroll in a program greater than 36 months, you might want to consider bankruptcy as an option. The longer the programs last, the higher the probability that a creditor might sue you.
• No large financial purchases- Anyone who is considering making a large financial purchase (house, car, student loan) in the future should not consider debt settlement. Your credit score while in the program will take a huge hit since your creditors will be reporting you delinquent.
Now what about those non-profit credit counseling agencies? Don’t be fooled into thinking that their services are free. They usually charge a small enrollment fee + monthly maintenance fee. On top of that, they get paid by your creditors a percentage of your payment.
• Ability to make about 2% of balance payment- If you have $10,000 in debt, you should be able to make a payment of at least $200/month. Credit counselors will enroll you in a Debt Management Plan that can last up to 60 months.
• Concern for Credit- Besides paying on your own, credit counseling is a debt relief program that will have the least affect on your credit. You will have a notation on your credit report stating that you’re in a credit counseling program, but that remark itself does not affect your credit score.
• No Use of Credit Cards- Creditors will close your accounts at their request once you enroll in the program. After all, what good would the program do if you were allowed to use your cards?
• Less than 3 months behind- If you’re only a few months behind on your bills, a debt management program can re-age your account and get you current. You still have a chance to get back on your feet!
It’s important to fully understand each debt relief option and their consequences. These are just some of the basic guidelines for someone who is deciding which program to enroll to. Of course, there are other variables that you should consider, but this is the general gist of it. So again, make sure you know what your available options are and take the time to understand how each program works!