Alternatives
At American Debt Control, we know that falling into debt is something that can happen to anyone. We realize that there are a lot of options to solve this problem – if you search “debt” on the Internet, you get virtually hundreds of results – and we want you to be well informed about what these options could potentially mean for you.
Below are some of the available options for debt relief, and we’ve included the pros and cons of each.
Bankruptcy
Bankruptcy is the legal process of dealing with your debt with your creditors. Through bankruptcy, you may have your debts discharged, or you may work out a repayment plan with your creditors. Once debts are discharged through bankruptcy, creditors are no longer allowed to collect on them. There are two types of bankruptcy: Chapter 7 and Chapter 13.
How Chapter 7 works:
Bankruptcy is a legal proceeding that relieves a debtor of all or some of the debts they owe. Chapter 7 bankruptcy, known as liquidation, liquidates your eligible assets and uses the proceeds to pay back your creditors. After any eligible assets have been liquidated and creditors have been paid, you would typically be dismissed of all other consumer debts. After the bankruptcy dismissal, you would no longer be legally responsible for repaying the debt. Additionally, a creditor could not collect the dismissed debt from you.
Recently, the federal government passed a law to protect the bankruptcy system from abuse by people who could afford to repay their debt. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) mandates that all bankruptcy filers’ earning above the median income for their state be given a means test. You can find out your state’s median income from the U.S. Census Bureau.
To fail the means test, (a) you must make more than your state’s median income, and (b) your average monthly disposable income over the next five years is more than $100. Consumers who fail the means test are not allowed to file Chapter 7 bankruptcy. Your case would either be dismissed outright or be converted to a Chapter 13 bankruptcy.
So how much does bankruptcy cost? Well, you are required to pay a $245 filing fee, a $39 miscellaneous administrative fee, and a $25 trustee surcharge – a total of $309. Hiring an attorney to handle your case could add additional charges to your total.
Bankruptcy filing fees are due to the clerk of the court the moment you file your bankruptcy petition. You are given the option of paying in four separate payments, to be paid in full before 120 days from the date of filing. If your earnings average less than 150% of the poverty level – rendering you unable to pay the fees at all, even in installments – you may have the option to have these fees dismissed. Failure to pay your fees on time can result in having your case dismissed.
Chapter 7 bankruptcy will affect your credit rating and will appear on your credit report for up to 10 years after your filing. You will also be unable to file another Chapter 7 bankruptcy for eight years or Chapter 13 bankruptcy for four years.
How Chapter 13 works:
Chapter 13 bankruptcy puts you on a three- to five-year payment program to repay all of your debt. You must also submit a repayment plan to the court, after which you will begin making payments to the court (who pays your creditors). This is required even if your plan hasn’t been approved.
After a few weeks, there will be a hearing to approve your payment plan. Even if your creditors object to the plan, the judge has the final say. Once your plan is approved, you will begin making payments to the court. Upon completion of your plan, all remaining debt is dismissed. You are no longer liable for dismissed debts.
If you have secured debt, such as a car that you want to continue to make payments on, Chapter 13 may be a better option than Chapter 7 (as Chapter 7 requires you to surrender certain liquid assets). Additionally, you may not be able to file Chapter 7 if your income is above the median in your state.
According to the U.S. Bankruptcy Code, you may not file Chapter 13 if you have more than $922,975 in secured debt and $307,675 in unsecured debt.
As with Chapter 7, under Chapter 13 you will be required to receive credit counseling from an approved counseling agency.
Our assessment:
- Bankruptcy will have a severe negative impact on your credit rating for seven to 10 years
- Applications for employment, a home loan or personal loans often ask the question
- It is very likely that your only option is Chapter 13, in which the court system and judges are in charge of your finances
- You may end up paying between 25% and 75% of your debts
- Often people who leave debt settlement and try to file for Chapter 7 typically end up getting a Chapter 13 and ultimately return to the settlement program
- The fee amounts may vary, but one thing remains the same – the fees will be costly; in addition to your debts, you will also end up paying over $1,000 on average in attorney fees
Consumer Credit Counseling Services
One alternative is to enlist the aid of a consumer credit counseling agency. This service involves both financial education and debt counseling (depending on your situation).
Your credit counselor will assess your debt and assign you a payment plan based on your income. Some counselors can even negotiate to lower your interest rates and help you set up a payment plan with your creditors.
How it works:
The counselor analyzes your entire credit situation: number of accounts, balance, minimum payment, balance due, and any past-due account. The counselor then takes your current financial situation (monthly income and bills) into consideration and puts together a debt-payment plan. This proposal is sent to each of your creditors, who must approve it.
Upon approval of the plan, you begin to make payments to the credit counseling agency. These payments are disbursed to the creditors according to the payment plan. Oftentimes, your accounts are cleared of future charges as long as you are on the plan.
Many counseling agencies claim to be nonprofit. This does not mean free. In many cases, you will need to pay fees. Sometimes your first payment covers the agency’s fee, while others deduct a flat amount from your monthly payment.
Be cautious of fees – you should never be asked to pay a fee just to obtain information about the company and services offered.
Our assessment:
- Many credit card counseling companies are funded by the credit card companies themselves
- These companies DO NOT reduce the total debt you owe, only the full balance plus interest
- It will often take from five to 10 years to pay everything off
- It is viewed by lending institutions as a Chapter 13 bankruptcy; it will remain on your credit report for up to seven years
*The monthly payments required are typically quite a bit higher than with Debt Settlement.
Credit Card Consolidation Programs
Debt consolidation involves combining all your separate debts into one overall amount. This is usually achieved through a debt consolidation loan, which is used to pay off all your existing debts and must then be paid off by you.
How it works:
Some forms of debt consolidation do not involve a loan. Many people opt to transfer their debt balance to their credit card (provided the card has a high enough credit limit). Others choose to combine their credit card debt with their mortgage, take out a second mortgage or home equity loan, or use a student loan. Either way, the purpose of this method is to combine your debts into one place, typically a loan.
Advantages of debt consolidation
- Lower monthly payments. By spreading your payments over a longer period of time, debt consolidation usually brings a lower monthly payment. The lower payments help ease a tight budget.
- Lower interest rate. With debt consolidation, you should aim for a lower rate loan or credit card. Lower interest means lower cost of debt overall.
- Easier-to-manage debt. After debt consolidation, you have only one debt payment to manage rather than several different ones. You don’t have to worry about various billing statements, payment amounts, and due dates. Managing a single debt will certainly relieve some of the stress of debt.
Disadvantages of debt consolidation
- Your home is at risk. When you secure your debt with a mortgage or home equity loan, you risk foreclosure if you fall behind on your payments.
- Higher cost of debt. While extending your debt over a longer period of time can lower your payments, it also increases the cost you pay for the debt. You will end up paying so much more over 20-25 years with it being combined with your house payment and accrued interest.
- You may need a co-signer. If your credit score has already been hurt by late debt payments, you’ll need to find someone who’s willing to co-sign the loan for you.
Using debt consolidation is a viable option if you can do it at a low cost, without risking your assets or the assets of others.
Taking a close look at the advantages and disadvantages of debt consolidation puts you in a better position to decide whether to consolidate your debts. Realize that while debt consolidation can make it easier to pay off your debt, it doesn’t actually solve your debt problem.
Many people in debt have overextended themselves, lived without emergency or contingency money, and used debt to fund a lifestyle they couldn’t afford. Debt consolidation just masks the effects of these problems. It doesn't actually solve them. You must fix the habits that led you to debt in the first place. Otherwise, you can easily find yourself back in the same situation.
Our assessment:
- With consolidation, you are basically taking unsecured debt and securing it with your most valuable asset (property, home, or land)
- It will also reduce your ability in the future to use equity in your property
- Missing any payments would cause you to lose ownership of your property
- You will pay back the full amount of all balances, over 15-25 years
Credit Card Debt Settlement
Credit card debt settlement involves satisfying your credit card debt by paying less than you really owe over a shorter period of time. With American Debt Control, this usually happens in 12-36 months and reduces your unsecured debt by a substantial amount.
How it works:
This is typically for someone who is in a financial hardship situation such as job loss, divorce, or illness but doesn’t want to go the route of bankruptcy. A Debt Specialist will assess your financial situation and figure out the best length of program and best budget for you to settle your unsecured debt in the fastest time frame you are capable of handling. Once you start the program, funds are saved in a personal account as the funds accumulate; your accounts are settled one at a time throughout the program. This is bringing you back to zero.
Our assessment:
- This program is not for everyone; if you are able to pay more than your minimum payments and see an end to your debt, then we suggest doing your best to handle it on your own
- Debt settlement can potentially save you a substantial amount on what you owe in unsecured debt
- Debt settlement is a shorter program than most other debt relief optifons out there
- Debt settlement allows you to get out of debt in a short amount of time and back on track for a better financial future