Nearly everyone that is presently being dragged under by debt has tried using their credit cards less, and has tried making higher monthly payments than the requested ones, only to see their level of debt increase rather than decrease.
The next stage is to try some sort of system that they’ve read about, and if they’re lucky enough to find one that works for them, then they may eventually get debt free, after a number of years.
If the debt is simply too big and the interest too high, then the debtor’s thoughts eventually turn to credit counseling, debt settlement, debt consolidation and even bankruptcy.
Bankruptcy is usually left to last however, as it is generally seen as the choice that will always be left when all else fails, but it should be noted however that in a minority of cases it might be the best decision for a person to make, earlier rather than later.
Most people have some idea of what credit counseling means, but they often think it’s little more than sitting down and getting some tips from a friendly counselor, but it’s much more than that.
What Will Credit Counseling Do For Me?
A good one will,
a) Negotiate a lower interest rate.
b) Set up a repayment plan.
c) Show you how to reduce expenses.
In a great many cases, the credit counselor should be able to reduce a monthly payment of $800 – $900 to around $550.
How Much Does Credit Counseling Cost?
The first meeting should be free, followed by a monthly charge of around $35 per month to cover operating expenses.
What’s Different About Debt Consolidation?
Debt consolidation can be compared to an equity loan, that effectively combines all your different debts into a single one, that has only one set of charges, and a lower interest rate than all the others combined.
Please note that debt consolidation is really only viable if your credit rating is still in good shape, or you have a home or something similar to use as collateral.
A good debt consolidation agency should,
a) Carry out all the negotiations, thereby removing a lot of the stress.
b) Get you the very best interest rate.
c) Arrange just one monthly charge.
d) Stop all the harassment.
So How Does Debt Settlement Work?
Debt settlement in essence means that the creditor and debtor agree to new loan terms that are more favorable to the borrower.
The creditor has to be persuaded that it’s in its interest to do so, and that refusing to cooperate will result in the debtor declaring bankruptcy, which is the last thing that the creditor wants.
The negotiations are not for the faint-hearted, and they are also very time consuming because many times a deal that was agreed to in principle has to be renegotiated several times.
The reason that deals have to be continually renegotiated, is that a number of different creditors are generally involved, and they have no interest in what you are negotiating with their competitors.
So the final deals can only be sealed and signed, when there is a deal with every creditor that the debtor will be able to live with.
Any restructuring of debt will have a negative effect on your FICO score, and the amount that it will be affected will depend mostly on how good or bad it was before you restructured it.
If your credit rating has already been shot to pieces, then it should scarcely be affected, whereas one that is excellent will be affected the most.
In theory, if debt consolidation is done right, it should not damage your credit rating at all, as it is in essence using a home equity loan to pay off other debts, but it does mean taking out a new loan, and a restructuring of debts, which credit rating agencies don’t like to see,
We mentioned above the need to have a good agent handle your affairs, and that is because there are many flakes out there, and there number is increasing because real estate agents and others that were left without gainful employment due to the recession have entered an arena that they know next to nothing about.
Nobody wants to deny them a living, but it shouldn’t be at your expense.
The bottom line is that should only go to a BBB (Better Business Bureau) affiliated agency, and make sure that you understand what you’re signing.
Have the contract repeated and explained until you understand it completely, even at the risk of appearing a dummy!
Getting free from debt will always be a positive move, so regardless of which option you choose, do it sooner rather than later.
The author of this article was a film producer, and award winning film sound editor for many years. He has long been interested in finance and economics, and one of his websites -> Home Loan Help has a large number of very popular articles about the world’s economy in general, and bad debt loans, debt settlement, debt consolidation, and bankruptcy in particular.
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