If you have a number of delinquent bills and notices of default, you have some choices to make. Avoiding your debts is not the solution. Help exists for those who need it, and some of it is provided by nonprofit organizations. Verify the organization's record with the Better Business Bureau before making payments, however. The debt industry is riddled with scam artists.
Varieties of Debt Relief
After gathering your outstanding bills, you must evaluate the level of help you need. Do you have enough income to make the minimum payments and need just a little help? If so, credit counseling -- and possibly a debt management plan -- may be adequate.
If you're overwhelmed by debt, are several months behind in payments or have accounts that have gone to collection, you may need to consider a more serious remedy, such as settlement (or even bankruptcy). Your credit will suffer significantly if you take those actions, but you could be free of debt much faster.
Credit Counseling and Debt Management Plans
There are several credit counseling agencies, but the National Foundation for Credit Counseling (NFCC) is America's oldest. Before investigating settlement or bankruptcy, call the NFCC for a free debt and budget evaluation. You may find that a debt management plan (DMP) is what you need to get back on track.
In a DMP, the counselor negotiates with your creditors on your behalf. Although the accounts will be closed, your interest rates and possibly your payments may be reduced. Fees are minimal (and in some states, nonexistent), and everything typically is paid in full within five years if the DMP is followed.
Of each option, DMP participation has the least damaging effect on your credit. Check your credit report to make sure the closed accounts are listed as closed "at the consumer's request."
Debt Settlement: Scam or Not?
Negotiating a debt settlement with the creditor is a legal remedy for a delinquent borrower. Often, outstanding bills are settled for 30 or 40 percent of the amount owed, a huge savings. The most favorable deals are arranged for those who can pay settlements in full with a single lump sum payment. However, staggered payment arrangements sometimes are possible.
The biggest drawback to settling a debt is the effect it has on your credit. Accounts are closed by the lender and usually are noted on your credit report as "settled," not "paid in full." If you are planning to apply for a loan over the next two or three years, it will be difficult to obtain approval.
Consumers should thoroughly investigate the settlement company they're considering hiring. Many settlement companies are reported to be sham operations that charge thousands in fees and disappear before a settlement has been reached. The Better Business Bureau's "Find Business Reviews" webpage is helpful in determining which companies are legitimate and reliable. Contact your state Attorney General's office as well to request background information on the company in question.
Bankruptcy
If all else fails, bankruptcy is your last resort. It should be avoided if possible. It's devastating to your credit rating and difficult to recover from, and you'll probably need to hire an attorney. However, bankruptcy actions stop collection calls and foreclosure proceedings. It also wipes out many types of debt, such as credit card debt. Your employer-sponsored retirement assets are protected, as well. IRAs also may be protected, depending on where you live.
Before filing for bankruptcy, you must participate in counseling. You must pass a means test to determine whether your income is low enough for you to qualify for Chapter 7 bankruptcy. Consider also whether your employment will be affected. Bankruptcy has far-reaching implications.
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