What Are My Debt Resolution Options?

What are all of the pros and cons of each debt resolution or debt consolidation option?

What are all of the pros and cons of each debt resolution or debt consolidation option? How will each affect my credit report?

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Bill's Answer
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Highlights


  • Learn about debt resolution.
  • Compare different options for resolving debt.
  • Understand the pluses and minuses of each approach to resolving debt.

There are a variety of debt resolution options available.

To find the right one, you need to carefully weigh why you got into debt.

You also need to understand how each debt resolution option works, so you can find the solution that's right for you.

When comparing different options, pay attention to:

  • The size of the required monthly payment
  • How long it takes to become debt free
  • The total costs to pay off all your debt.
  • How your credit rating is affected

Credit counseling is a very common form of debt consolidation. There are many different companies that offer credit counseling services.

A credit counseling agency will often be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. Because the main benefit of the program is reduced interest rates, it less effective if your interest rates are already low.

In a credit counseling program, you are still repaying 100% of your debts, plus interest, though your monthly payments should be lower.

On average, most credit counseling programs take around five years.

While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy. It is, after all, using a third party to re-organize your debts.

Debt settlement, also called debt negotiation, is designed for people with a serious financial hardship. The hardship makes it so they either cannot pay their bills or are about to start falling behind.

Monthly payments in a debt settlement program will be lower than in credit counseling and usually far lower than what you're paying each month in required minimum payments to your creditors.

Debt Settlement programs typically run around three years. Keep in mind that during the your debt settlement program, you are not paying your creditors.

This means that a debt settlement solution of debt consolidation negatively impacts your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program.

However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. Debt settlement cuts your total debt, sometimes by over 50%.

The biggest trade-off in debt settlement is accepting a negative credit rating, for a period of time, versus saving money.

Many people think first of a debt consolidation loan when seeking debt consolidation.

In a debt consolidation loan, you exchange one loan for another, usually with the goal of a lower monthly payment or lower costs over the life of the loan.

You may take out a secured consolidation loan, or taking out a second mortgage or home equity line of credit. A cash-out refinance which carries a lower interest rate and is tax deductible can be a smart way to pay off high interest rate credit card debt.

It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation. If there is ever a time that you can't afford the new mortgage payment, you put yourself at risk of foreclosure!

Unsecured debt consolidation loans are another option. Rates are generally far higher than on a secured loan. Shop for unsecured debt consolidation loans at banks, credit unions, or . Contact multiple lenders, to comparison shop for the best deal.

The rates you'll find on unsecured loans are primarily based on your credit score. You need an excellent credit score, over 740, to get the best rates.

If your credit is not excellent, but is improving and you're having trouble finding a loan, speak with one of the consultants at

Bankruptcy may solve your debt problems. It is a severe option, but is the best option for some people.

A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort.Since bankruptcy reform went into effect, it is much harder to file for bankruptcy chapter 7.

You may only qualify for a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, your debts are reorganized. The debts are repaid, according to the terms established by the bankruptcy court. Chapter 13 bankruptcies usually run three to five years.

If you are considering bankruptcy, I encourage you to consult with a qualified bankruptcy attorney in your area.

You may be curious what may happen if you do just stop paying your creditors and take no other action. If you stop paying your unsecured debts, creditors have the right to collect the debt.

First, you will likely receive collection calls and letters directly from your creditors. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.

Third-party collectors are known to be much more aggressive in their collection tactics than original creditors. Don't be surprised if the collection calls become more persistent, or even threatening.

Thankfully, the has rules governing the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules.

In some cases, when all other collection efforts fail, a creditor will decide to sue you. This is not a frequent occurrence, but it is within a creditor's rights and is a possibility about which you should be aware. If one of your creditors sues you for a debt you defaulted on, the court will likely issue a judgment in the creditor's favor.

Depending on your state's laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, place a lien on your property, or take other action to enforce its judgment.

Regarding a credit report, default damages a credit score severely. In addition, default is a warning flag for many lenders, who will refuse to deal with a potential customer with a default on their record. As a result doing nothing and allowing default is a poor option for most consumers.

Summary

There are many forms of debt consolidation, Each consumer is different, so find the debt consolidation option that fits for you.

Here are some fast tips for your own quick Debt Consolidation Evaluator:

1. Look at consolidating debt in a mortgage refinance, if you have strong credit and have equity in your home.

2. If your primary debt problem is high interest on your credit cards and you can afford a to pay about 3 percent of your total debt each month consider Credit Counseling.

3. Consider debt settlement if you want the lowest monthly payment, to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections .

4. Seek a bankruptcy consultation, if you can't meet your monthly payments and can only afford less than 1.5 percent of your total debt each month.

Bills.com makes it easy for you to .

I hope this information helps you Find. Learn & Save.

Best,

Bill

25 Comments

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  • 35x35
    Feb, 2013
    Kasey
    I have 14 negative accounts and 1 in collections, all from my younger/naive years. What is the best way to pay these off and get them off of my credit report? I can pay most of these in full as they are small amounts, but I heard negative experiences from numerous people still being harassed after paying in full (the collector kept trying to get additional money even though it was paid in full). I want to avoid this at all costs, just pay off the debt and get it off of my credit. Any advice is definitely appreciated!
    0 Votes

    • 35x35
      Feb, 2013
      Bill
      The phrase, "Get it in writing" applies here. Negotiate a settlement with each original creditor or collection agent on the telephone, and explain your concern to the negotiator. Tell them you want a clearly written agreement in writing using the magic word "settlement" and printed on their company's letterhead. A phrase like the following spells out the intent of the parties clearly:
      (Your name) promises to pay (name of collection agent or original creditor) the amount of ($XXX.XX) as a final settlement for (name of account, if any) account number (ABC123). Upon receipt of (your name)'s payment, (name of collection agent or original creditor) promises to notify Equifax, Experian, TransUnion, or any other consumer credit reporting agencies it has reported this collection account to, that the debt status shall be set to "Paid as agreed" or a substantially similar status. Because this account is settled (name of collection agent or original creditor) agrees it has no further right to collect or assign the account.

      Edit what I just shared here to make it fit your circumstances.

      Keep copies of your settlement agreements and payments. Should an unscrupulous collection agent try a second bite at the apple, so to speak, send it a copy of the settlement agreement with an explanation that the collection agent is in breach of contract, and any further attempt to collect the debt will result in you taking civil action in your state's court of law.

      1 Votes

  • 35x35
    Jun, 2012
    Jennifer
    I have 2 big credit cards and the total balance together are about 21,000. I have been contacted by a company on doing a debt consolidation. I'm considering it but my husband told me to look them up on the BBB. Well they are rated a C with many complaints. I'm not sure what to do. The idea of cutting my credit card debt in half is great and I really want to do it but not sure if it's the smart thing to do. So, is it just that easy to cut the credit card debt in half and me just make payments for 2 years which I fully intend on cutting that 2 years to atleast into 1 1/2 years but double some payments. Need help on what is the right decision please.
    0 Votes

    • 35x35
      Jun, 2012
      Bill
      Great question! Please see the Bills.com resource Reliable Debt Consolidation Companies for my answer to another reader who asked a similar question.

      Regarding the BBB, this is problematic. Starbucks, for example, does not pay for a BBB membership, which results in no rating for the company. If we knew nothing else about Starbucks this would make us suspicious of Starbucks as a cafe. However, anyone who's ever visited a Starbucks knows the products they sell and the service offered are usually very high quality.

      Which leads me to my point: the BBB rating is based on the total number of complaints, and not the ratio of complaints to the number of customers served. If the BBB rated Starbucks, it would probably have a very poor rating because if the BBB received one complaint per Starbucks location per year, Starbucks would have more than 15,000 complaints every year. This would seem terrible at first glance, but would be really a rock-bottom number based on the number of customers served daily.

      My point is, take the BBB rating with a grain of salt.
      0 Votes

  • 35x35
    Jun, 2012
    Damebochie
    These are some pretty good tips to help manage your debt and credit. I am currently trying to do that since I just started a job.
    0 Votes

    • 35x35
      Dec, 2012
      Erika
      I found the article very helpful, too.
      0 Votes

  • 35x35
    Apr, 2012
    Chris
    I live and am self-employed in California. Can a credit card company put a judgment against my business (LLC) bank account? Also, my wife has her own checking account. Can they put a judgment against it even though my Social Security number is not on that account and her SS# is not connected to the credit cards? Because California is a Community Property state, can they garnish her wages? I own 3 vehicles outright with the following resale values: $8,000, $7,000 & $6,000, can they repossess them? I owe $30k to Amex & $20k to Wells Fargo. They've both offered a 50% reduction, so total owed would be $25,000 if paid back in lump sums. Unfortunately, I can't afford that. Amex has accepted a 36-month payback for the full $30,000 but Wells Fargo wants $10,000 in 12 months. I have no equity in my home. Any suggestions?
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      If your LLC was created using the formalities required by the state, properly funded, operated according to state law, and was not an alter-ego for your own personal finances, then your LLC should be immune from your own personal finance difficulties.

      In a community property state, a judgment creditor for Spouse A has the right to garnish the wages of Spouse B. This is a rare occurrence in practice, however.

      The California exemption for personal vehicles is $2,300, and $4,850 for commercial.

      My advice? Consult with a bankruptcy lawyer. I am not suggesting filing bankruptcy is the answer, but a bankruptcy lawyer will explore your LLC question, and discuss your other options.
      0 Votes

  • 35x35
    Oct, 2011
    Green
    i have some debt on my credit report that i'm not responible for and doesn't relate to me
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Dispute any inaccurate derogatories entries appearing on your credit report. Follow the link I just mentioned to learn how.
      0 Votes

  • 35x35
    Aug, 2011
    Adam
    I owe $26,000 on a motor home that we bought in 2008. I can not afford the payments and storage fees on it anymore. When I bought the RV I lived in California. I have recently moved to Texas but I am still using a family members address in California until I am settled. My wife and I are both unemployed, but will be working in the future. I would like to take my RV into a consignment dealership who did a phone appraisal of $11,000 to $18,000. Is it correct that now that I live in Texas they won't be able to apply a wage garnishment for the difference when we are working? I have an account with my name on it for my son who is under 18. Could they possibly take his money is there is a judgement against me for the balance in the future?
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      It is likely true that your wages will be exempt from garnishment, although there may be a period of time you need to live in Texas before the protections apply. Consult with an attorney for more details. If there is a judgment against yu, any account with your name on it is at risk, even for one you share with a minor

      Try to work out a short-sale with the RV dealer. If you can get them to agree to allow you to sell the RV that may bring in more than if it is repo'd and auctioned, as well as reduce miscellaneous charges you may be hit with for the repo and storage.

      Consider enrolling in a debt settlement program or negotiating a settlement for any deficiency balance that remains.
      0 Votes

  • 35x35
    May, 2011
    frank
    I am not a US citizen. i was a student in NY. Due to some bad business decisions i accumulated about a 20K debt on my credit cards. i returned my car cause i couldn't make payments anymore. i left the US in 2007 due to some family issues. now i want to come back to finish my degree. what problems could i have upon arrival?
    0 Votes

    • 35x35
      May, 2011
      Bill
      If you are asking whether you will have problems entering the country, I don't believe there will be any problem. The problems you may face could arise in regards to your future wages and any bank account you have.

      The first thing you want to do is to figure out what you owe and to whom. Get a free copy of your credit report at annualcreditreport.com. Review it carefully, to see if your accounts are now in the hands of collection agencies. Also check the "public records" area of the credit report to see if there are any judgments against you. You may want to pull from more than one credit bureau, just to gain more complete information. At annualcreditreport.com you can get one free report from each of the three bureaus every 12 months. I recommend pulling two now and saving your other free pull for 4-6 months down the lone.

      It is likely the case that your car was auctioned off and you are on the hook for the difference between what it sold for at auction and what you owed. There could even be extra fees added.

      Once you know what you owe and to whom, you can lay low and hope the boom doesn't hit your head or you can be proactive and contact the holders of your debt. Contacting them makes more sense if you have some money to use to make a lump-sum settlement, if you can negotiate a reduced payoff balance with your creditors. If not, you can try to work out payment arrangements. Don't volunteer where you work, if possible, as that could speed up a wage levy.

      Check the statute of limitations (SOL) for debt in the state you move to. Because you were out of the country, it is possible that the statute will not apply, due to what is called 'tolling.' Tolling refers to keeping the running clock on the statute on hold, because the creditors had no reasonable chance to collect from you while you were abroad. Still, it is worth examining the SOL, as it may not come to your creditors attention that you were abroad. Lastly, you may want to consult with a bankruptcy attorney, upon your return, to see if that is an option for clearing out your debts. Ask the bankruptcy attorney if there could be any impact from filing bankruptcy on your immigration or resident-alien status. Please report back on what develops.
      0 Votes

  • 35x35
    Apr, 2010
    Bill
    If your last payment on the debt was 10 years ago, the statute of limitations for a creditor can take legal action on the debt has almost certainly passed. See the Bills.com resource Collection Agency, Collections Laws & Statute of Limitations to learn more about your rights and potential liabilities.
    0 Votes

  • 35x35
    Apr, 2010
    carolyn
    My credit card debt was incurred more than ten years ago when my husband was dying from a botched surgery. With all the associated problems, I never paid it off and now owe over 4,000 dollars. Is there a statute of limitations or a limit to liability?
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    Typically, creditors will start getting aggressive about negotiating settlements near the charge-off date (typically that is 180 days delinquent) and thereafter. You may want to check out a debt settlement or debt relief company We think highly of Freedom Debt Relief. Good luck.
    1 Votes

  • 35x35
    Mar, 2010
    Dr.
    I've been on a credit counseling plan since June 2006, and progress towards getting out from under the principal is excruciatingly slow. $32k in 2006, paying $1025/mo so far via direct deposit. I am seriously considering moving to PA or TX to prevent wage garnishment, and attempt some sort of debt settlement. Is there a particular length of time to let bills go (90 days?) before creditors will discuss debt settlement?
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    The collection agent purchased the debt for pennies on the dollar, and agreed to you payment plan to keep the statue of limitations a non-issue. In time, the debt collector may try to collect more from you if your financial situation improves. Alternatively, you may wish to work out a lump-sum settlement with the collection agent to settle the debt.
    0 Votes

  • 35x35
    Mar, 2010
    Maria
    I am being sued by a credit card company because I defaulted. I took a substantial pay cut and my interest rates shot up to 29%. I wrote them asking if they could lower the interest. I couldnt make the payments, I fell behind in my mortgage, and just now recently caught up (the mortgage). I offered to pay the credit card company 100 a month, but they said no, mocked me, etc. Now I have this civil suit. I called the lawyers representing the ccc and they said they would take the 100 a month "temporarily" and would send me papers agreeing to that. They also said they would still get a judgement against me. So what happens next? Its a 10,000 debt.
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    You are in the "tough" phase that second mortgage holders seem to go through with debtors who have defaulted. It is common for second mortgage holders in this stage to tell debtors there is no negotiation -- pay up or else. Sometimes they will go to "or else." Usually second mortgage holder will negotiate. Start negotiations at 10 cents on the dollar for a lump-sum settlement of the second mortgage.
    0 Votes

  • 35x35
    Feb, 2010
    bob
    After a second mortgage is charged off do you think they will be more willing to negotiate a settlement then before. The first and second mortgage were NOT reaffirmed in a chapter 7 bk. We are still paying on the first and we are underwater by about $20,000. We are 6 months behind on 2nd and Greentree will not accept a settlement offer of any sorts on our balance of $77,000. They said the are aware the values are down but they will not entertain a settlement. What should we do???
    0 Votes

  • 35x35
    Feb, 2010
    Klaudia
    My husband and I have significant credit card debt and are both out of work. We have been self emplyed for years and have been struggling to keep our business and home finanaces going. Don't qualify for unemployment. We've both been looking for outside work for about 1 1/2 yrs. We're on food stamps and just had to have assistance from the state to pay our power bill. My husband is being sued by one of his card companies (~$27,000 which includes boat loads of interest). We can't afford a lawyer, we are barely able to keep the lights on, borrowing money from friends and family to keep our home. The bank has the lien on our property. We have no capacity to set up any kind of payment plan. We work litterally, odd jobs to make enough cash to keep the phone & internet. Without internet we'd have NO ability to seek employment. We agree we owe the money (I have a little problem with the extensive interest) and will begin making payment when we can land meaningful employment. We live in a VERY rural area and competition for jobs is fierce. We also have college degrees which actually makes it harder to get a job around here. Any suggestions would be appreciated?
    14 Votes

  • 35x35
    Dec, 2009
    Bill
    The article above provides a succinct outline of your debt resolution options. Reread it. Then I think your next step is to compare your options. Visit the Bill.com debt savings center to get no-cost, no-obligation quotes from pre-screened service providers and compare these options to what BofA is offering you.
    0 Votes

  • 35x35
    Dec, 2009
    george
    Thanks in advance for your advice. I have being paying minimum payments on credit card debt of 40 k for two years. My credit and income are still good, I just havent paid attention to this problem. was offered consolidation from Bof A. What optioins do you think are available.
    0 Votes