In today’s economy, with high unemployment rates and outrageously high living expenses, it is no wonder that so many people find themselves in a quagmire of unsecured debt. Most Americans now have at least one credit card account, many of those falling into the “sub-prime” category, meaning due to their credit rating they are getting charged twice the normal fees and interest. Many of these accounts will only offer a $300 or so credit limit, and often will have up to $200 in fees on the card upon initial activation. Then there are monthly maintenance fees, interest rates as high as 41 percent, and then when you use the card, you find yourself over the limit and being assessed as much as $35 for each over limit occurrence. In the event something goes wrong, and you are unable to make the monthly payment on time, you are then looking at also being assessed a $35 late fee as well, making it virtually impossible for the average consumer to get the account to a current, under-limit status. Faced with all of this, many consumers will turn to other sources to try to get help with their debt problems.
One option that many people choose the debt settlement, also referred to as debt negotiation. Debt settlement companies are not the way to go if you are in the least bit concerned about your credit score. The majority of these companies work out a plan where you sign a power of attorney to them, and you either send them, or allow them to debit a payment from your bank account every month. The payment amount may be significantly less than the total sum of all of your minimum monthly payments. The company then holds the money in an account until they feel they have enough to make an offer on an account. They normally do not make monthly payments to your creditors on your behalf. Debt settlement does not stop or change the interest and fees from accruing on your account, and you will continue to show past due until the balance is either settled, paid in full, or charged off as a bad debt. After six months with no payment, credit cards will go into charge off. Charge off has basically the same effect of your credit as bankruptcy does, except in charge off it looks like you willfully chose not to make your payments, whereas with bankruptcy, you at least acknowledge the debt you owe, but are simply unable to pay it back. Most debt settlement companies will try to get your creditors to settle your debt for 40-50% of the total balance. But, keep in mind, that your creditors are not required to make any arrangements with these companies. You signed an agreement with your creditors to pay the debt, and agreed to the terms and fees, so ultimately the contract is between you and the creditor, not the debt company and the creditor. One thing that is often overlooked when you are talking to a debt settlement company, is that in the event any creditor settles for more than $600 off of the total balance, you have to file a 1099 form for the difference on that years income tax return.
If you are interested in protecting your credit and paying off what you owe, but can’t afford the required minimum payments, or can’t get caught up due to the interest and fees being added to the balance, then debt consolidation or credit counseling is the way to go. It is certainly a much better option for your credit than debt settlement. If you decide to take the credit counseling path, the first thing you will need to do is get all of your current monthly statements and bills together. Don’t just include the bills you are putting into the program, but everything, that way you and a counselor can plan a budget that will suit your needs and allow you to pay your debts. Once you have gotten everything together, do some research and decide what company you are interested in. Usually non-profit companies will be your best bet, so that you can ensure everything you pay will go to your debt, and not in fees to an outside agency. Call or make an appointment to talk with a counselor. You will try to find a balance that will let you make the best use of your income between paying your debt and having money for living expenses and day to day needs. Once a budget can be agreed upon, the company will send out proposals to your creditors, asking them to accept the new monthly payment, cease all late and over limit fees, and lower the annual percentage rate on the account. Keep in mind, just with debt settlement, your creditor is not required to accept any proposals, but most will to try and satisfy the debt. If you have a credit card that you have made purchases on within the past thirty days, or that is already seriously past due, your proposal may be denied as well. You will either have to wait a set amount of time and try again, or in the case of being past due, pay the current amount due and resubmit the proposal. Once everything has been signed and agreed on, you will either send in your payment to the credit counseling agency, or allow them to draft it from your account. They will then hold it for processing, and send it out to your creditors. It may take a little time and effort on your part to get everything ironed out, as far as due dates, and proposal acceptance, but once you do, it is basically a worry-free way to pay off your debt. When you pay one debt off, you can either instruct the company to split that payment among the other creditors left, or request that they lower your minimum monthly payment. The only reflection on your credit is that the account is being paid thru a credit counseling organization, and the account will show as being closed by the creditor, which would have happened anyway if you were past due or over the credit limit.
The most important thing is to be smart enough to realize when you are in over your head, and seek help before it is too late. Make sure you research any company that you are considering, and maybe even check the Better Business Bureau for complaints or issues. Be prepared to continue paying your creditors until an agreement can be reached, and try to protect your credit as much as possible. It is easier to be responsible with it in the first place, than to go back and try to raise a bad credit score later.