Refinance Debts 101

What most people are looking for in a debt management program does not exist. I find myself constantly on the phone with clients who are drowning in credit card debt, looking for the perfect debt management program. This is the criteria they are usually seeking: - Eliminate all debts quickly - Have a positive effect on their credit - Not have to deal with any phone calls from creditors

Reality Check: There is no such program!

I have found throughout years of helping people free themselves from debt, that most are initially looking for the option that does not exist. To reiterate, there is no debt relief option in existence that will give you the above benefits. Let’s take a good look at the options that are available and provide some basic information about each one.

Debt Consolidation Loans: Debt consolidation loans are, in most cases, home equity loans or second mortgages. This is when you take the equity out of your home to pay off credit cards or other unsecured debts. The positive is that you can exchange your high-interest unsecured debts for a lower-interest, single payment that can sometimes have a tax benefit. The negative is that most people who have a lot of unsecured debt will not qualify for a loan, or have any equity in their home.

Consumer Credit Counseling: These are the companies that have been getting into a lot of trouble over past years. Typically non-profit, they claim to lower your interest rates and set you up with a low monthly payment to get you out of debt in 5-7 years by splitting your single payment into little chunks to pay each creditor a reduced payment. The upside is well there actually is no upside. Because these programs rarely ever do what they claim, and many credit card companies no longer participate in these programs, this has become a serious waste of money and time. The downside is, in addition to above, that your creditors will each enter a line into your credit reports on every account included that states that the account is handled through credit counseling. This will prevent you from qualifying for pretty much anything.

Debt Settlement: In the past couple years; this has become the most popular and most effective program for getting out of debt quickly. However, you must truly be in a financial hardship and not able to pay your current minimum payments. The strategy here is to negotiate with your creditors and get them to accept a settlement pay-off of less than the balance owed. All creditors will accept settlements as long as you have successfully shown hardship. In my experience, attorneys have been most effective in negotiations with creditors because they cannot be bullied by savvy collectors. The upside is that you can completely settle your debt for pennies on the dollar in a very short period of time; usually 3 years or less. The downside is that your accounts must become very delinquent before creditors will accept settlements. This is not a problem if you are in a financial hardship; after all, you are already not able to make your min payments, so going delinquent was happening anyway.

Bankruptcy: It used to be that anyone could file chapter 7 bankruptcy and easily eliminate any amount of debt quickly. Since the Bankruptcy Reform Act, most people no longer qualify for bankruptcy, and have no other alternative but to try other options like debt settlement first. Bankruptcy is a legal court proceding where those who are completely insolvent are able to usually protect their primary residence and eliminate their debts owed. The positive is that once a chapter 7 bankruptcy is fully discharged, your creditors literally write off the debt and will not and cannot pursue you further. The negative is that it is a permanent and public court record, and can also remain as a public record on your credit report for up to 10 years.

I hope you find this to be helpful information that will also provide you with the ability to choose the best debt management program given your circumstances.

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