When you have significant debt it can do so much more than eat up your income. Constant worry about finances can affect your relationships and your physical and mental health. So when you see the words debt relief, it’s easy to concentrate on the “relief.” It’s important, though, to understand all your options and what consequences come with them. In this blog, we’ll look at debt management, debt settlement, and debt consolidation. You’ll know exactly what they are and the implications of any choice you make.
Debt Management – What it is
With debt management, your financial situation is reviewed by a credit counselor, who then creates a debt management plan for you to follow. Generally these run for terms of 3 to 5 years. Some organizations may take control of your monthly payments, making them on your behalf.
Consequence – It costs money
Most places require you to pay an enrollment fee, and then there is a monthly fee for each credit card you have. Don’t be fooled by places that claim to be free; they may do the analysis of your financial situation for free, but the actual debt management will cost you.
Consequence – It decreases access to credit
Most debt management companies require you to agree not to seek any additional credit during the time that the debt management plan is in place (and 3 to 5 years is a long time not to need additional credit). Also, the fact that you’re engaged in a debt management plan will be noted on your credit report, so even if you’re allowed to access credit, it will be more difficult to get.
Consequence – It usually doesn’t work
At least half of clients do not successfully complete the debt management plan. Obviously, failing to complete a plan would have implications for your credit score, and you would find yourself right back in the same situation, but with the added negative of that failure.
Debt Settlement – What it is
Debt settlement differs from debt management in that the organization you work with negotiates with your creditors on your behalf to decrease the amount you owe. Sometimes, they offer a lower lump sum payment to the creditor; sometimes, they seek debt forgiveness or lower interest.
Debt Settlement – It costs money too
Just like a debt management plan, you will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan.
Debt Settlement – The IRS is involved
It’s crucial that you understand that any forgiven debt is reported to the IRS and the IRS treats that as income. So while you may be barely keeping your head above water financially, you might be shocked to discover that instead of a tax refund, you end up owing money to the IRS.
Debt Settlement – Your credit score may plummet
Debt settlement companies are not concerned with your credit report. Their job is to get the current debt lowered or forgiven. Most debt settlement companies ask you to suspend payments to your creditors while they negotiate on your behalf. This strategy has a tremendously negative impact on your credit report since the most significant factor is payment history.
Debt Consolidation – What it is
In its most basic form, debt consolidation combines multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. The most common ways to pursue debt consolidation are to obtain another credit card where you can transfer all your other debt; or to take out an actual loan for this specific purpose.
Debt Consolidation – You may lose possessions
If you take out a secured loan, then whatever you have put up as collateral is at risk. Sometimes you may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan. So if your bank has also financed your auto loan, for example, and you fall behind on the loan payments on your debt consolidation loan, you could wake to discover your car has been repossessed.
Debt Consolidation – Access to credit decreases
If you are trying to consolidate your debt by acquiring another credit card, that will create a “hard inquiry;” if you are taking out an actual loan, it will do so as well. Hard inquiries result in lower credit report scores, so even if you are successful in acquiring a new credit card or a consolidation loan, your credit score will definitely suffer.
If you’re interested in debt relief, contact the experts at Burr Law. We’ll guide you to the best solution for your particular situation.