Debt Relief Solutions are Often Misunderstood |
By Kenneth Long on November 17, 2010
.JPG.aspx?width=75&height=75) Television, radio and internet advertisements claim that they can help you take care of your debt problems. Some providers are for-profit, others nonprofit. Debt relief solutions can also range from debt management programs to debt settlement plans to even bankruptcy. Since there are so many options and all claim to provide “debt relief”, how do you know where to begin and who to trust?
What is a Debt Management Program?
Nonprofit charities and for-profit debt management companies provide debt management programs to clients struggling to afford monthly credit card payments. Some debt management companies provide faster and more dependable services than smaller mom and pop charities. Many people prefer the personal touch and attention to counseling and education provided by nonprofit organizations.
Both offer what is called a debt management program (DMP). A DMP consolidates payments on unsecured debt while helping you repay your debt through improved terms. Qualifying clients can normally expect to pay less on a monthly basis, yet still repay their debts in full over a three to five year time period. Substantial interest rate reductions, lower monthly payments and waived late fees are common benefits provided by most major creditors. DMPs work best for clients who are current or have made recent payments to their unsecured creditors.
What is a Debt Settlement Plan?
Debt settlement plans are contracts with mostly for-profit companies that claim to be able to negotiate steep reductions in your principal balances. Until October 27, 2010 these companies charged large upfront fees of up to 15% of your balances. New consumer protection rules regarding debt settlement have caused many debt settlement companies to stop enrolling new clients.
Debt settlement companies measure success by having a client settle at least one debt. Given that measurement, average “success rates” from debt settlement companies range from seven to eleven percent. Creditors do not participate in debt settlement plans as a matter of policy, though some do routinely accept settlements from cardholders directly or through a debt settlement plan.
Settling a debt may be an option for a debtor in default on one or two debts. “Savings” through a debt settlement plan rarely merit the high fees charged by providers. Also, since fraud has been so common in the debt settlement industry, it can be difficult to avoid becoming a victim of debt settlement scams. Based on the traditionally high fee structures and their lack of success, most debt settlement companies are rated “F” by the Better Business Bureau.
Is Bankruptcy a Better Option?
Bankruptcy is generally reserved as a last resort for debtors who are hopelessly insolvent. It is especially attractive if you owe large amounts of debt and need protection from creditors who plan to pursue legal action against you.
In certain cases, bankruptcy might be the appropriate option for you. Credit counseling organizations will let you know if you may need the protections provided through bankruptcy. To find a reputable bankruptcy lawyer, you should consult the bar association in your state.
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