By Dee Dee Sung
Swimming in debt
Q: I'm deeply in debt and falling behind on my payments. I need to find some relief and my problem is that I don't understand all the options available to me. Could you outline the available choices so I can start to take action?
A: The first step to taking positive action is to understand your options so that you can make an educated decision. There's so much information available that it's easy to get overwhelmed by all the offers and advertisements.
There are essentially four debt relief options for consideration. They are as follows:
1. DEBT CONSOLIDATION
There are a couple of approaches to consolidating debt. One way is to transfer your credit card balances onto lower interest rate credit cards. In effect, you'd be transferring unsecured debt onto another unsecured debt instrument with no tax benefit which could perpetuate your debt problems. Another way, if you are a homeowner with available equity in your home is to take out a home equity loan or line of credit. The unsecured debt becomes secured and not only could you lower your overall interest rate (depending on your credit rating and credit scores) and monthly payment, you would also get some tax advantages. This approach works only if you get your spending under control and stop creating new debt. Otherwise, you are just piling on additional payments to your already overstretched budget.
2. CREDIT COUNSELING
A credit counseling company will work on your behalf with the credit card companies to negotiate lower interest rates on your credit cards. They may also attempt to have late payment and over-the-limit fees forgiven. In turn, you will be set up on a predetermined monthly payment that will be disbursed to your creditors proportionately by the credit counseling company. You will be responsible for paying back the full amounts due plus interest and you can expect to pay a set up fee as well as a monthly fee. In addition, because of their relationship with the credit card companies, they may also receive a percentage of what they recover from you.
3. DEBT SETTLEMENT or NEGOTIATION
This option is for when you are in financial hardship and either can't or don't want to declare bankruptcy. Debt settlement companies have working relationships with a number of creditors and will negotiate the amount of debt you will be required to pay back based on a percentage of the total amount owed. For example, if you owe $10,000 in unsecured debt, a settlement company may negotiate a 50 percent settlement on your behalf which would mean that you would owe a total of $5,000. Of course, the settlement amount will vary from case to case. If you decide to go this route, make sure the company you select is in good standing with the Better Business Bureau and a participating member of the United States Organization for Bankruptcy Alternatives (USOBA).
4. BANKRUPTCY
Typically the option of last resort, there are two types of bankruptcy. Chapter 7 is a straight bankruptcy where you obtain a discharge of your existing debts and it's important to note that some debts are not dischargeable by law. Typically, a bankruptcy trustee is assigned to liquidate your assets to pay your creditors and there are certain assets that are exempt from liquidation. Chapter 13 is a reorganization of your debts and does involve a repayment over time. Although a bankruptcy will remain on your credit report for up to 10 years, it will be possible to reestablish your credit within two to three years after being discharged. A new law coming into effect in October, 2005 will make it more difficult to declare Chapter 7 bankruptcy and candidates will be required to pass a means test to determine if they are eligible based on current income and expenses. Consult with a bankruptcy attorney for complete details prior to making any legal decisions.
It will be important for you to research each option to determine which one will best fit your situation. There are many service providers in each category to choose from so make sure you choose someone you trust and preferably comes recommended. Above all, you will need to examine what got you into this situation so that you don't find yourself back on debts' doorstep in the future.
Metro Detroit speaker, author and syndicated radio personality Dee Dee Sung is the founder and creative director of The Debt Free Diva with a mission to educate, entertain and inspire people in reinventing their relationship to money. Be sure to listen to Magic 105.1 every Sunday at 7:30 a.m. for "The Debt Free Diva" talk show. To learn more, visit www.debtfreediva.com.
