Credit card debt relief has become a top priority for many Americans. Gone are the days of holding multiple accounts with high balance limits. Consumers have grown weary of paying the minimum balance which covers little more than interest rates.
It can be obtained in various ways. Many people are turning to debt settlement companies that offer the promise of slashing credit card balances by half or more. While it is true debt settlement can reduce outstanding balances, consumers often spend as much money settling debts as they would paying off creditors directly.
Debt settlement companies charge a startup fee and monthly maintenance fee. These fees often amount to nearly half the amount of negotiated debt. For example, if consumers owe $10,000 in credit card debt and the debt settlement company negotiates the balance to $5,000; consumers would save 50-percent. However, the cost to obtain the savings could range from $2,500 to $5,000; resulting in little to no savings at all.
This is not to say that consumers should not investigate the option of debt settlement. Some companies use a sliding scale which bases fees on earned income. Others assess fees based on a percentage of reduced balances. Prior to entering into an agreement with debt settlement companies, consumers should visit ConsumerFed.org to review other alternatives which may provide the same, if not better, results.
Consumers who are drowning in debt often turn to credit card bankruptcy. This debt relief option often causes more harm than good. First of all, it is expensive to file bankruptcy. Filing fees and legal expenses can cost debtors $2,500 or more.
Many people believe that filing bankruptcy will wipe out debts and provide them with a clean financial slate. The truth of the matter is new bankruptcy laws were enacted in 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act require debtors to repay a portion of debts under Chapter 13 bankruptcy.
Debtors are required to undergo the ‘means’ test to determine the amount of debt to be repaid. The means test compares debtors’ income to their states’ median income. Those who earn the same or more than the median income are required to establish Chapter 13 payments. Creditor payments are submitted to the bankruptcy Trustee who distributes payments to creditors until debts are fully repaid.
Chapter 13 payments are in addition to normal monthly expenses. If debtors are financially incapable of contributing funds, creditors have the right to request the bankruptcy petition be dismissed. When this occurs, debtors fail out of bankruptcy and no longer have protection from the court.
Individuals who file for bankruptcy protection are required to obtain credit counseling through an approved U.S. Trustee agency. Consumers with excessive credit card debt should consider obtaining credit counseling prior to submitting a bankruptcy petition.
Most credit counseling agencies are well-connected within the credit industry. Credit counselors can often help consumers negotiate outstanding debt by obtaining a reduced rate of interest or reducing the amount owed.
Consumers should obtain credit counseling through an agency approved by the U.S. Trustee Program. If credit counseling does not provide required results, consumers can move forward with their bankruptcy petition and will have met credit counseling requirements of the court. A list of approved credit counselors is presented at USDOJ.gov.
Debtors who own real estate with accrued home equity might be able to obtain credit card debt relief by obtaining a home equity loan. Mortgage loans are assessed a much lower rate of interest than credit cards. Using a home equity loan to pay off credit card debt can save debtors a considerable amount of money, but also places their home at risk for foreclosure if they default on loan payments.
Conquering debt requires time, commitment, and a solid get out of debt plan. Debtors should explore all available options including budgeting, credit counseling, debt consolidation, debt settlement, and credit card bankruptcy to determine which strategy can help them reach their financial goals without completely destroying their credit rating.