Resolving Debt Part I

PART I Despite what the commercials on TV say, getting out of debt is not simply a matter of filing for bankruptcy or making a phone call to a consolidation agency. If you call a debt agency to resolve your debt, they will charge you a fee to make a phone call and issue you a personal loan. If you file for bankruptcy, you feel the windfall from that for seven years or more. Debt is a very real situation; it has serious repercussions and is a contributing factor to the current economic situation. It is irresponsible to assume that one can carelessly spend more money than they have, let alone believe someone else will clean up after you.

It should be noted that the material in this article can apply to most kinds of debt. However, there are rare cases where so much debt has been assumed that it may be in that person’s best interest to turn to an independent consumer’s association for advice. The first part of this two-part series will address some potentially bad methods of seeking debt relief. The second part of the series will outline a six-step process that you can utilize to attack your debt yourself.

Recently, the business of debt relief has been booming in the U.S. People see it as an easy-out to their financial burdens. Unfortunately they do not question how the “debt relief” people work their magic, which can lead to misunderstanding and even more problems. Debt relief services work by assuming your debt in the form of a loan (terms at their discretion). Once they issue you a loan, your debt is considered “consolidated” and you pay the company one low payment each month until the debt is resolved. Hopefully this sounds familiar.

On one hand this method can be good, but that is only if it is used correctly. Often people will find themselves making a payment for $50.00 here and $100.00 there. Once they are finish making minimum payments they realize they are spinning endlessly in a hamster’s wheel. With a debt consolidation, they can allow you to make one simple payment and eventually pay off their debt. Key word is eventually, meaning that it will take you many more years to pay off the debt by making these smaller minimum payments than you would probably like to think.

On thing that I’ve learned in business is that a lot of your business comes from repeat customers. Debt relief companies know how the human psyche works; they know a percentage of their customers will see clean balances on their accounts and begin spending again. Eventually some will have doubled the debt they walked in with. This is one of the cons of the debt consolidation/ relief businesses. That is, they do not address the underlying problem: Poor spending habits!

So what are your other options? Bankruptcy comes in two major filing options. Chapter 7, which you turn over your assets to a trustee whom sells all the assets you have. You are also usually permitted to keep a small amount of property, but don’t think it will be those Coach bags you purchased. The second filing option is Chapter 13, which allows debt to be settled through future income, rather than through the liquidation (selling) of a persons assets. Chapter 13 is available to debtors with unsecured debts less than $100,000 and secured debts less than $350,000. You should also be aware that in 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. The BAPCPA states that “Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their states median income will not be required to pay.”

When it comes to your credit after bankruptcy, the bottom line is that your credit will be hurt. Once you file, all three credit agencies will add the information to your records. According to the Fair Credit Reporting Act, a bankruptcy can remain on your credit report for upwards of ten years from the commencement of the case. Each creditor accounts for a bankruptcy differently, but you should expect very high interest rates and frequent disappointment upon requesting credit for that ten year term.

In most cases, it is far better to pull yourself out of debt. Most people feel overwhelmed at the thought of it, but I assure you that it is possible. With tenacity and a plan, you can be debt free in anywhere from six months to two years. This is a far cry from the years of minimum consolidation payments you would make or the ten years of aggravation dealing with creditors after a bankruptcy. Thus, keep in mind that when it comes to getting out of debt, patience is truly a virtue.

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