Credit Counseling and Debt Relief Pros and Cons
Living in debt has become a way of life for most Americans today. The average household owes somewhere around $18,000 and that number is steadily rising. At some point, many individuals find they are unable to cope with the burden themselves - the pressures to pay off creditors, save for retirement, put away money for college, or even have a working household budget become too much. At that point, many turn to credit counseling for assistance.
Contrary to popular belief, credit counseling isn't just for people who are close to filing for bankruptcy. Reputable credit counselors can and do help many Americans dig out from under debt and stay that way, enabling those individuals to get back on their feet and live without having to constantly worry about the crushing weight of credit card debt.
To that end, credit counselors offer not only advice, but can implement a variety of options designed to get you out of debt. But like anything else, each of these options has benefits and drawbacks. Let's explore some of these options - and their corresponding pros and cons - so when you're faced with making this major decision, you already have an understanding of what you may be getting yourself into.
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Consumer Credit Counseling
A popular debt relief option these days is debt consolidation through credit counseling, which typically involves consolidating or combining your credit card and unsecured debts into one, more structured, and more manageable monthly payment made to a credit counseling agency. The goal is to help you manage your debts better and hopefully, pay off your debts at an accelerated pace.
- All your debts are consolidated into one monthly payment
- Interest rates may be reduced and late fees or penalties waived
- You can get on a predicable plan to become "debt-free"
- The one monthly payment may still be too high for some people to comfortably pay off each month
- If a payment is late, credit card companies may remove you from the program, then reinstate late fees and penalties
Debt Settlement Pros and Cons
- Can significantly reduce the amount of your credit card debts
- Increased savings potential on your balance
- Creditors will only settle on past-due accounts, so this program will affect your credit rating harshly, especially in the short-term
- Creditors do have the ability to reject negotiations all together and take legal action to try to collect the full balance owed to them
- Debt collection calls are a way of life during the negotiation process, even if your debt relief specialist tries to minimize them
- Savings through the program are taxable by the IRS
Chapter 7 (Personal) Bankruptcy Pros and Cons
Chapter 7 Bankruptcy involves the liquidation of your non-exempt property as a means to secure funds to assist in paying off debts to your creditors. In exchange for the liquidations, your debt obligations are then forgiven.
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- Almost all of your debt (with few exceptions) can be eliminated very quickly
- Once creditors learn of your intent to file, they must cease all collections activity immediately (even before the filing officially goes through)
- If you don't possess any non-exempt assets, you can become debt-free without losing, or paying, anything
- Chapter 7 Bankruptcy results in the most severe credit impact - this type of bankruptcy stays on your credit report for 10 years
- If you own assets that are not exempt, you'll be forced to turn them over and have them used to pay off your creditors
- The process is extremely personal and invasive, as courts and bank trustees scour all your financial records
- In addition to staying on your credit report for 10 years, a Chapter 7 Bankruptcy stays on legal records for a full 20 years
- Most job and loan applications ask "have you ever filed for bankruptcy?" - and lying on this question is a federal crime
Chapter 13 Bankruptcy Pros and Cons
Filing for Chapter 13 bankruptcy allows you to retain all your property while you restructure your debts - no liquidation of assets required.
- One simple monthly payment
- Chapter 13 is less damaging to your credit rating than when one files for Chapter 7
- All collection efforts by your creditors come to a complete stop after filing, and this is enforced legally
- While less damaging than filing for Chapter 7, Chapter 13 bankruptcy will still negatively affect your credit rating for seven years
- Your disposable income must be turned over for three to five years - this is a very long time period to not have any considerable "spending cash" and should not be underestimated
- The courts determine what your disposable income is by county averages, and not what your own personal expenses are
- Successfully completing a Chapter 13 bankruptcy is a daunting task - estimates illustrate that 70% of all Chapter 13 filings are never fully completed
The Bottom Line
No matter which road you take, debt relief has its ups and downs. But if you're honest, diligent and disciplined throughout the process, the chances of you coming out clean on the other side are increased, and you can look forward to a fresh financial start.
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