Should you Sign-up with a Debt Consolidation Company?
The assistance that a Debt Consolidation (or Debt Relief) companies offer generally comes in two flavors. The first flavor is Debt Management, and the second is Debt Settlement. Before signing-up with a Debt Consolidation Company, I recommend reviewing your bankruptcy options with us first.
Debt Management Plans:
In a Debt Management plan, the Debt Relief company offers to help you manage your payments to creditors. You make one monthly payment to the Debt Relief Company, and they in turn make payments to your creditors. The Debt Relief company will attempt to decrease interest rates, reduce minimum payments, and waive penalties.
Here are several reasons why Debt Management Plans may not be successful. There is no legal obligation for your creditors to work with the Debt Relief companies. Many creditors will voluntarily work with the consolidator, but many creditors will not. Therefore, you may not be able to consolidate all of your debts in the Debt Management Plan. Next, if you are late, miss, or are short on your monthly payment to the Debt Relief company, then all of your creditors may go into default. If you were not in a Debt Management plan you could have strategically selected which creditors were critical to pay, and which ones had a lower priority. Finally, if your minimum payment on a creditor in the plan has been reduced, then the time horizon for paying off the debt may increase, and you end up paying more interest overall.
Debt Settlement Programs:
In a Debt Settlement program you stop paying your creditors, and start making a monthly payment to the Debt Relief Company. Instead of the Debt Relief
Company then paying your creditors, they save your payments in an escrow account. Once the escrow account has a significant amount of funds built up, they make settlement offers to your creditors.
There are several key drawbacks to Debt Settlement programs. First, when you stop paying your creditors, your credit score will be negatively affected. Next, it is difficult to build up the escrow account to an amount that creditors would accept in a settlement. In the meantime, it is likely that your creditors will file collection lawsuits and obtain legal judgments against you, before you have enough time to save substantial funds in the escrow account.
Chapter 13 Bankruptcy Payment Plans:
Rather than applying for a Debt Management Plan or Debt Settlement Program, you should consider filing Chapter 13 Bankruptcy because it has many advantages. A Chapter 13 is basically a court ordered Debt Management Program. You make one payment a month to your Bankruptcy Trustee, and the Trustee in turn makes payments on your debts. All of your creditors are obligated under law to participate in you Chapter 13 Bankruptcy. Chapter 13 Payment Plans last 5 years (or 3 years if you qualify). The major advantages of a Chapter 13 Payment Plan are: 1) It's possible to pay much less than you owe; 2) Interest on credit cards stops; 3) You can payoff arrears on your house and cars, and reinstate secured loans in default, thereby preventing foreclosure and repossession.
Please contact us to discuss these options and more. We are glad to help individuals resolve their debt issues.
Schedule a Free Consultation or Ask a Question.
We are proud to help individuals improve their financial futures. Please contact us to schedule a Free Consultation or to ask a Question.