Orlando, Fl -- Let's face it, debt repayments are a major component of every household budget, whether it be for the repayment of a mortgage loan, car loan, or credit cards.
Every month consumers are faced with the reality that they owe someone (or someplace) money, and they factor those payments into their budget.
The majority of these debts carry very long repayment timelines and often consumers can find themselves at a point in their life where their income is not sufficient to maintain the repayment terms of their debts (for the purposes of this article we are referring specifically to unsecured debts- credit cards, signature loans, store cards, gas cards, etc.
).
When faced with the reality that they may not be able to remain current with payments consumers are likely to scour the internet looking for solutions or "debt relief" - two search terms that can produce a cornucopia of confusing and overstated resolution options.
"Save up to 70% off what you owe, Clean up your credit in under 30 days, Save tens of thousands" and many other claims cross the home pages of debt relief companies, some claims being close to realistic, others being outright misleading and deceptive.
So how do you as a consumer recognize what is what? How do you determine what is a true statement and what is simple sales copy and exaggeration? The answer is simple...
by reading the rest of this article, of course.
In all seriousness it can be a lot easier to see through the nonsense when you understand the fundamental principles behind the different types of resolutions.
So in order to get a clearer picture we are going to discuss each industry individually, starting with debt management.
Debt management refers specifically to those companies offering a Debt Management Program or DMP for short.
These services can be offered through Debt Management Companies and through Credit Counseling Agencies (I'll explain the difference shortly).
A Debt Management Plan is a structured repayment agreement with your creditors where you are proposing to pay a fixed amount each month until the debt is resolved.
The creditors are willing to make concessions as part of the agreement including lowering the monthly payment requirement and also reducing the Interest Rate.
It is important that you understand how interest works to really see how beneficial this is.
If you have $15k in debt and a 25% APR on your credit card it means that you are paying roughly $3,750.
00 in interest each year (if you divide that by the number of months in a year you get what you pay monthly in interest).
This would equal approximately $312 in monthly interest (3750 / 12 months).
If you are paying just minimum monthly payments it would mean that you are sending in $375 per month on the debt.
Because of the interest being charged and the low amount being paid each month only $63 of what you are paying goes toward reducing the account balance.
This means that if you only make minimum payments it will take upwards of 18 years to pay the debt off.
Here is another factor to consider.
Your minimum payments are based on a percentage of the total debt being carried (generally 2-2.
5% of the debt amount).
This means that as you pay down your balance, your minimum payments go down.
This has the biggest impact on repayment timelines.
Paying just the minimum payment can turn into a lifetime trap.
With debt management that same debt could be paid off for $300 per month and be done in less than 5 yrs.
That is the power of debt management.
It helps by reducing interest rates and establishing a fixed payment amount that does not go down when the debt amount starts dropping.
Credit Counseling refers to the consultative component of debt management.
A Credit Counseling agency will often do detailed budget evaluations, and run hardship metrics against your situation to determine what course of action can be taken to help reduce your debt and pay down what you owe.
This may or MAY NOT mean enrollment into a Debt Management Plan.
Many Debt Management companies offer some degree of Credit Counseling, while many Credit Counseling Agencies also offer Debt Management Plans.
It is important when looking at DMP providers and Credit Counseling Agencies that you feel your concerns are being addressed and more so that you understand your situation and what they are proposing.
Debt settlement is another form of debt relief that has seen a lot of public scrutiny over the last few years...
for good reason, too.
What debt settlement aims to do is help consumers in a state of extreme financial hardship to negotiate settlements on their debt (repaying a debt for less than the total amount owed).
This requires creditors to make a pretty sizable amount of concessions on the accounts and they will typically only do so if the account is in jeopardy of being charged off (no payments for 4-6 months on the account or longer).
If the accounts are already charged off and in collections they may be willing to accept slightly less.
Usual settlements will occur at ranges between 40 and 70 percent of the total amount owed.
It is very important to stress though that Debt Settlement is not a one size fits all solution.
It really only works in situations where consumers are legitimately considering bankruptcy as an option or where all other options for repayment have been exhausted.
Settlement works by having consumers save money each month rather than sending it to each of their credit card bills, as time goes on you build up enough savings to offer a percentage settlement ("I'll give you $2,000 to call the $5,000 debt settled").
If the creditor or collected agrees you will no longer owe anything on that account, depending on the amount of the debt however you may end up having to pay taxes on the settled debt.
Debt settlement is often poorly explain and often offered to individuals not properly suited for it.
This causes a lot of confusion and poor outcomes for DS programs.
The FTC recently made it illegal for companies to charge anything before successfully settling an account.
So if you see a company looking for a big down payment or retainer, Don't walk, RUN.
Credit Repair has seen a lot of hype lately as well.
This service is not posited as a Debt Relief service, but it deserves some noting.
Most credit repair organizations rely on loopholes in the credit reporting guidelines that allow people to challenge the validity of a debt.
They blast letters challenging the accuracy of a debt to the bureaus.
These claims that a debt is not valid or accurate must be responded to and if a response is not received within the established timeline, the credit repair company will demand that the item be removed.
Sometimes these efforts work, but it is only a temporary positive, as legally valid items cannot be removed from your credit report.
Since these firms often do achieve temporary results they are able to charge their large fees (often hundreds of dollars) for something that really is of no long term benefit of any kind to consumers.
So there it is, the debt relief industry in a nutshell.
Now that you understand what options are out there and what options work, and which options do not...
you can weed through the noise on the internet and find the right service for yourself.