Options for Paying Off Debt

Struggling to pay off your debts? With so many choices, which one is right for me? When it comes to working through financial difficulties and getting out of debt, there is no one-size-fits-all solution. Each individual’s situation and financial hardship is unique, therefore requiring that the appropriate option or solution meet their individual needs. We'll analyze your debts, income and assets, and help you prepare a realistic spending plan, and then present you with solutions that fits your abilities and needs. We are not allowed by law to provide any legal advice or representation.

The only person that can get you out of debt is you. There are several options to getting out of debt, though none is easy. Listed below are various options for tackling your debt.

Option 1: Self-Managed (Do-It-Yourself)

Money Management
Managing debt and spending is a constant challenge for many people. While most people have the intent to be financially fit, they simply just do not have the right tools to reach financial independence. Becoming financially fit is a realistic goal, and one that everyone – regardless of income – can attain.

The first step in reaching this goal is to stop overspending. This sounds simple, but for most, it’s quite the opposite. The fact is, if you don’t have the right tools, you will continue struggling with overspending and debt accumulation.

One excellent way to control your finances is by using a spending plan. The amount of money wasted each month on unnecessary purchases can be surprising - $5 here, $10 there – it adds up quick if you’re not paying attention. A spending plan combats poor spending habits by identifying where you will spend and save your money so all your money is accounted for. By tracking ALL your spending, you can identify the areas where money is wasted and redirect that spending to bill payment, saving for retirement, or some other savings goal.

Follow the steps below to create a balanced monthly spending plan:

• List your income and create a list of all your assets.
• Complete a list of your debt obligations.
• Compare income vs. expenses.
• Set priorities and make changes so your income will be greater than your expenses.
• Track every purchase and monetary transaction.
• Compare your actual performance with your plan.
• Make adjustments as necessary.

Contact Your Creditors
If you can't make ends meet because of temporary emergency (job loss, illness, divorce, death or a loved one, or an other compelling reason), contact each of your creditors and ask them to reduce their monthly bill until you get on your feet again. Explain why you are falling behind and try to work out a modified payment plan that reduces your payments to a more manageable level. Some creditors may offer some type of in-house assistance program. These programs typically reduce payments for brief periods, generally up to 6 months. Unfortunately, not all creditors will agree to a modified payment structure, so you may find your overall debt load is still too heavy for your budget, even after contacting all your creditors. If you find this is the case, you should consider the next option – Credit Counseling / Debt Management Plan.

Option 2: Borrow from Family or Friend

Borrowing from a family member or friend may seem like the answer to your prayers or the easy way out, however you should carefully review the following considerations before you take a chance on ruining a great relationship without improving your financial situation.

• You are sure your friend or relative will be able to afford to give you money without hurting their financial situation.
• You are willing to disclose the extent of your financial situation to the person, including if you may be considering bankruptcy.
• If you are considering bankruptcy, you have spoken with an attorney about the effect on the loan to your friend or family member as well as any payments made on this loan prior to filing.
• Whether your relationship would be at risk if you defaulted or were late on the loan.
• It's important that you define the terms of the loan specifically and put them in writing to avoid misunderstandings.
• You are certain that the loan will solve all of your money management issues and not be a temporary fix that delays an inevitable undesired outcome.

Option 3: Credit Counseling (Debt Management Program)

Credit Counseling
Credit counseling is a combination of financial education, budgeting assistance and debt counseling. The Consumers Union says credit counseling is often the best choice for consumers who are struggling with high interest rates but capable of paying back their debt. A good credit counselor will analyze your financial situation and encourage you to talk about your financial challenges. A Certified Counselor will review your whole financial situation including both your budget and debt, and will educate you on the merits of options available to you. AAA Fair Credit Foundation is licensed as a non-profit consumer credit counseling agency.

Debt Management Plan (DMP) - Full Balance Debt Repayment Plan
In a DMP, participating creditors will typically offer special concessions like lower monthly payments and lower interest rates. Many creditors will also “re-age” (bring current) your account and report it to credit reporting agencies as current instead of past-due. A DMP isn’t for everyone. For example, it won’t lower your secured debts, like mortgage or car payments. Also, if your debts are completely unaffordable or you are in danger of losing your home or car, a DMP is probably not your best option. It is also good to know that while creditors may report an account is being administered through a credit counseling agency (this notation does not affect your credit score). However, accounts enrolled in a DMP must be closed and your participation may also limit your ability to obtain new credit while you participate in the program. DMP is a program provided by AAA Fair Credit Foundation.

You may consider a debt management program under the following conditions:

• You can pay for all of your essential debts and living expenses and still have enough money left in your budget to complete the program as agreed.
• You are trying to avoid filing bankruptcy.
• You are aware of the disadvantages and risks associated with trying to settle debts on your own and those of using a program service.
• You wish to repay your debts and are concerned about preserving your credit rating.
• You are current but very near to falling delinquent on your creditor payments, or you are behind on your payments and are receiving collection letters and calls.
• You are qualified to participate in an accredited credit counseling service.
• You are aware that missing even one payment in a debt management program could result in the failure of the program.
• You are aware of all advantages and disadvantages of the program.

The Debt Resolution Plan™ (DRP) is designed for consumers who cannot qualify for a full balance DMP and are considering filing bankruptcy or customers with insufficient income. Upon completing an initial counseling session and determining the consumer is unable to qualify for a full-payment Debt Management Plan (DMP), an independent third party conducts an assessment to calculate an individual or household's ability to repay unsecured debts, such as credit cards, medical bills, and personal loans. Based upon the results of the assessment, our Counselors will recommend the most suitable debt resolution program (Debt Management Program (DMP), Debt Resolution Program (DRP), or bankruptcy as the least preferred option).

Option 5: Loan Options: Balance Transfer, Home Equity, Debt Consolidation

Certainly not the worst thing you could do, but you must own a home, have some property or have some assets to pledge as collateral for the loan...otherwise a loan isn't even an option at all. In addition, you cannot borrow your way out of debt. You're still going to have to pay back the money to someone.

You may be in a position to lower your cost of credit by consolidating these debts into a second mortgage or a home equity line of credit (HELOC). Remember, these loans require that you put up your home as collateral on the loan. If you can’t make the payments, or if your payments are ever late, you could lose your home.

Also be sure to calculate the total cost of a debt consolidation loan. Like all other options, there are pros and cons to consolidating debts through a home loan. In addition to the interest on the loan, you may have to pay “points,” with one point equal to one percent of the amount you borrow. On the other hand, these loans can provide certain tax advantages not available with other kinds of credit.

You may consider borrowing against the equity in your home to pay off debts if you meet the following conditions:

• If your home has appreciated a good deal since you purchased it.
• Interest rates are low.
• You have relatively good credit to get approved for a loan or a line of credit using your home as collateral.
• Your financial difficulties were temporary and you situation has now stabilized.
• You have looked at your budget and can afford to pay all of your essential expenses and debt payments, including your new loan without taking on additional debt.
• You are aware of the risks associated with securing more debt to your home and the various fees and interests rates that can be incurred.
• You are willing to accept the risk of losing you home in order to avoid bankruptcy.

Debt Settlement is the negotiation and settlement of unsecured debts by a company for a fee. Debt settlement differs greatly from credit counseling and DMPs. It can be very risky, and have a long-term negative impact on your credit report and, in turn, your ability to get credit. Debt settlement is a process through which your creditor agrees to accept less than the full amount owed, yet considers the balance as paid. Settlement companies often advertise that they can negotiate reductions of 50 percent or more of the debt you owe. They then set up a repayment plan that typically takes between two and four years.

Different settlement companies have different fee structures, but there are two basic approaches. In one model, the settlement company’s fee will be a percentage of your total debt. The fees in that model typically range from 15-20 percent. Another option the settlement company may offer is to base their fee on the amount of debt reduction they can negotiate. Fees under this model can be as high as 35 percent. In addition, many settlement companies also charge a monthly fee that can range from about $19 - $89 a month for the entire program. Either way, it is not uncommon for settlement fees to total thousands of dollars.

Some commercial debt settlement companies front load their fees. In other words, they collect a large part of their fee before you receive any benefit. Much of the money you initially deposit goes to pay the settlement company to satisfy its fees. It can be months after you start the settlement program before your creditor receives any payment.

A settlement company may suggest that you stop paying your creditors and instead begin making deposits into a special third-party account. The settlement company will attempt to negotiate a settlement offer with your creditor once enough money relative to the debt is on deposit. This may take six months or more, although the exact length of time will vary with circumstances. During this time, the balance on your debt can continue to grow if interest and various penalty fees continue to be charged by your creditor. As a result, you may owe more than when you started and your credit may suffer because of your failure to make any payments on your debt. Even worse, legal actions such as wage garnishment or a judgment may be filed against you during this time.

Debts paid off through settlement will generally show “Paid by Settlement” on a consumer’s credit report. If you later apply for new loans or credit, when reviewing your credit report the prospective lender(s) will see that a previous debt was paid by settlement, indicating that your repayment did not cover the total debt that you owed, but that your creditor accepted a lesser amount.

The credit score is based on information contained in the credit report, with the highest consideration given to how you repay your debts. If you’re not repaying the creditor or have missed payments, it will show on your credit report and potentially lower your credit score significantly.

While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report and your credit score will be adversely affected. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.

Even if your creditor reduces the amount you owe, it doesn't mean you're free and clear. You may be responsible for taxes on the forgiven debt. If the forgiven debt totals $600 or more, you will generally owe income taxes on the amount forgiven, substantially reducing the total savings from debt settlement. The Internal Revenue Service considers the amount forgiven as income (reffered to as Discharge of Indebtedness) and the creditor will probably send you a 1099-C form to report it on your annual tax return at year end).

Option 7: Bankruptcy

You may consider Bankruptcy under the following conditions:

• You have done everything you can to deal with your debts but you still cannot afford to pay them.
• You have so much credit card debt relative to your income that despite not charging, your debt continues to grow.
• You are about to lose your home or your car.
• A creditor is about to levy against your bank account, seize your property, or garnish your wages and you will suffer a significant financial hardship as a result.
• You are about to lose your utility service.

Therefore the automatic stay gives you a little extra time to devise a plan to deal with your debts without having to worry that your creditors are going to create more problems for you.

Bankruptcy is a complicated legal process governed by federal laws as well as some state regulations; therefore, it is difficult to file for bankruptcy without the help of an experienced bankruptcy attorney.

The attorney will share with you his expert knowledge of the ins and outs of the law and the workings of the bankruptcy court in your area-information that will help you fully benefit from filing. The attorney can also help you decide what kind of bankruptcy you should file, either chapter 7 or chapter 13, and will make sure that you take advantage of all the property exemptions you are entitled to (for example, you may be able to choose between your state's exemptions and the federal exemptions) so that you can hold on to as many of your assets as possible.

Chapter 13 (Reorganization)
A chapter 13 reorganization bankruptcy helps you hold on to some or all of your nonexempt assets by giving you the opportunity to reduce your debt payments and pay off your past due debts over a three-to-five year period. Assuming you make all of your payments on time, you will be protected from your creditors during this time. You can also use Chapter 13 to eliminate some debt and keep your secured debts if you want to hold on to the assets thatcollateralize those debts.

When you file for Chapter 13, your bankruptcy attorney will prepare your debt reorganization plan, which will spell outexactly what you intend to do about each of your debts. Bankruptcy law requiresthat your plan treat certain kinds of debts in particular way.

For example:
You must pay the full amount of your priority debts during the term of your reorganization plan-three to five years. Priority debts include unpaid income taxes, unpaid property taxes, past due child support, and spousal support (alimony). With the exception of your mortgage loan, you have two options for what to do about your secured debts.

You can:
Keep the asset that secures a debt by paying your creditor the asset's market value plus interest during the term of your reorganization plan. You and the creditor will have to agree on the asset's value, which sometimes can be a stumbling block to pursuing Chapter 13. You must pay your unsecured creditors at least as much as they would receive if you filed for Chapter 7 rather than for Chapter 13. Examples of unsecured debts include credit card debts, unsecured loans, medical bills, utility bills, and so on.

After your reorganization plan has been filed with the court, you will have to attend a creditors' meeting. At the creditors' meeting, the bankruptcy trustee assigned to your case will ask you questions to make sure that you have been honest about your assets and your debts and to determine if you can afford to pay more than your reorganization plan indicates. Your creditors can ask you questions about your finances as well. A confirmation hearing will take place sometime later. At the hearing, the judge will consider any objections your creditors may have to your plan and will decide what to do about them.

For example:
The judge may require you to make specific changes to your plan as a result of those objections before he or she will approve it. Once it has been approved, you must pay your debts according to the plan until you have completed it. At that point, the judge will discharge or erase any remaining debts that you owe except for any debts that cannot be discharged, and your bankruptcy will be over. You will have to pay the debts that are not discharged.

Chapter 7 (Liquidation)
Filing for Chapter 7 bankruptcy may be appropriate if you have so much debt relative to your income that you can't afford to pay what you owe, even if your creditors agree to reduce the amounts you must pay to them each month. When you file for Chapter 7, the bankruptcy trustee will take all of your nonexempt assets, sell them, and use the sale proceeds to pay your debts. Since there will probably not be enough money to pay everything that you owe and since your secured debts take priority over your unsecured debts in bankruptcy,your unsecured creditors will probably receive little or nothing. At the end of your Chapter 7 bankruptcy, the judge will erase or discharge all of your unpaid debts, which means that you won't have to pay them. However, you will have to pay any debts that cannot be discharged or that are associated with anynon exempt assets you are keeping. For instance, child support, spousal support, student loans, criminal penalties and most taxes generally cannot be discharged.

One of the reasons people file bankruptcy is to get a "discharge." A discharge is a Court order which states that you do not have to pay some or all of your debts. Some debts cannot be discharged. For example, you cannot discharge debts for:

• Most taxes
• Child support
• Alimony
• most student loans
• Court fines and criminal restitution; and
• Personal injury caused by driving drunk or under the influence of drugs.

Also, if the Judge finds that you received money or property by fraud, that debt may not be discharged.

It is important to list all your property and debts in your bankruptcy schedules. If you do not list a debt, for example, it is possible the debt will not be discharged.

The Judge can also deny your discharge if you do something dishonest in connection with your bankruptcy case, such as destroy or hide property, falsify records, or lie, or if you disobey a Court order.

After discharge, you cannot file another Chapter 7 bankruptcy case for eight years. No one can make you pay a debt that has been discharged, but you can voluntarily pay any debt you wish to pay. You do not have to sign a reaffirmation agreement or any other kind of document to do this.

Some creditors hold a secured claim (for example, the bank that holds the mortgage on your house or the loan company that has a lien on your car). You do not have to pay a secured claim if the debt is discharged, but the creditor can still take the property.

To obtain a state-by-state list of approved credit counseling agencies visit www.usdoj.gov/ust, or contact a Federal Bankruptcy Court. Before you file a Chapter 7 bankruptcy case, you must satisfy a financial “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at www.usdoj.gov/ust.

Filing for bankruptcy should always be a last resort, since it can damage your credit for many years. And before seeking advice, be wary of any potential conflicts of interest from credit counseling agencies or bankruptcy lawyers that could potentially profit from your position. Get educated before seeking counseling or hiring an attorney.

Option 8: Postpone Decision (Do Nothing)

For most people this is not a practical solution, but technically it is still an option. An example where doing nothing might work for you would be if you were unemployed and had no assets a creditor could pursue to repay the debt owed. Essentially you would be judgment proof and your creditors would (at least temporarily) hit a roadblock. However, this does not mean that they can’t come after you at a later date when you least expect it.

By the way, if you're only making minimum payments on $20,000 in credit card debt, at a 18.9% interest rate, it will take you over 50 years to pay it off and you will pay over $50,000 in interest.

Those are your primary options for resolving debt. Short of winning the lottery, there simply aren't any other magical solutions for resolving outstanding debts. For immediate assistance, please call 1-800-351-4195 to discuss your options with a Certified Financial Counselor and get the help you need to solve your debt problems today.