When you are facing the financial difficulty of not being able to make your monthly payments toward your bills, it can often seem an insurmountable obstacle to tackle. Fortunately, there are many options to deal with your debt problems. These can range from debt settlement to bankruptcy.
Many people want to consider a bankruptcy as a last resort, so that leaves debt settlement as one of the main alternative options. There are many things to consider when deciding if debt settlement could help you out of your financial difficulty. Debt settlement occurs when you work with your individual creditors to try and negotiate the total amount you own down to a smaller amount and potentially at a reduced interest rate.
Debt Settlement Advantages
The usual amount that a typical debt can be reduced by can range anywhere from 20-50% of the original debt amount depending on the creditor owed. The advantages of debt settlement are that if you have too many assets to consider a bankruptcy it is a good alternative.
It can also save you money if your creditors choose to settle. It works particularly well to settle debts related to medical bills and other types of debt that are not your usual credit card debts.
Debt Settlement Disadvantages
There are some significant drawbacks to this tactic. First, the debt settlement only works once a debt has been sold to a collection agency. This means that you will have to stop making payments on your debt. This will have a negative impact on your credit score.
Debt Settlement only applies to unsecured debt, it will not help with a mortgage or car payment. Most of the companies want a lump sum payment and will not allow payment plans.
Another consideration is that if you are successful in getting a reduction of the total amount owed, whatever you do not pay will be considered “forgiven” and the IRS will tax you on the forgiven amount as if it were income. This can sometimes result in a large tax liability, so in essence, you are trading one kind of debt for another.
Credit Score Implications of Debt Settlement
One of the biggest implications is with regard to your credit score. The settlement will already have negatively impacted your credit score when you stopped making payments. This negative reporting will continue to impact your credit for seven years until it is charged off.
If you are in the process of a settlement agreement with a company, they could still at any time choose to initiate a lawsuit against you and garnish your wages and bank accounts. You can hire a company to attempt to settle the debts with your creditors, but be careful of paying them fees for a service that they cannot guarantee will work.
Another alternative to bankruptcy and debt settlement is debt consolidation. This is different from debt settlement. Debt consolidation is basically a lumping your outstanding credit card debt into one monthly payment at a reduced total and interest rate. Most of the credit counseling services offered require a repayment over a 3 to 5 year period.
One major benefit of this route to resolve debt is that you will only have one payment per month and at the end of the repayment term the rest is forgiven. This type of workout really only is applicable to get rid of credit cards or other major debts that show up on your credit report. Typically medical bills and other small types of debt do not get included. As with debt settlement this can work well if you are otherwise not a good candidate for a bankruptcy based upon your income or assets that you own.
Debt consolidation companies will typically take an upfront fee for their services, and as part of the agreement they will charge an additional fee on top of your agreed upon monthly payment to the creditors. One thing to be aware of is that most of the companies will not start paying out monies to the creditors until they have a certain amount of money they have collected from you.
This can be a problem if the creditors are expecting immediate payment as part of the agreement, so you need to have a good line of communication with the agency. If the agency is making the payments late this will have a negative impact on your credit score. However, if the agency is making the payments on time to the creditors, this will usually eliminate all of the harassing phone calls and notices and no negative impact on your credit score will occur.
One major drawback of this type of workout is that not all of your creditors have to agree to participate under the agreement. The agency cannot guarantee that all of your debt will be rolled into the repayment. This can leave you open to the other creditors filing lawsuits against you and potentially result in garnishments or judgments.
Line of Credit
A less used form of debt resolution is to take out a line of credit on a piece of real estate with equity in it. This can be very effective if you still have somewhat of a decent credit score. Often times you may be able to refinance or take out a home equity line of credit to pay off other unsecured debt. This may result in paying more overall for the life of the loan, but can spread out the payments enough to ease the immediate financial strain. If you do not have a good enough credit score to start out with, this may either result in a much higher interest rate or the complete inability to use this as an option.
If you are really only facing an issue with not being able to make your monthly mortgage obligations, you could look into a loan modification to reduce the amount of your monthly payment or interest rate. In 2009, the Home Affordable Modification Program (“HAMP”) was introduced. This allows a homeowner to lower their mortgage payment to 31 percent or less of their monthly gross income. Currently, the program has only been extended through Dec. 31 of 2015.
One great benefit to this option is that a loan modification can convert a mortgage that is currently an adjustable-rate mortgage into a fixed-rate mortgage. There are forms that you can fill out yourself without the help of an attorney, so it is pretty easy to attempt to negotiate one yourself.
Some things to consider are that you have to be able to document a financial hardship to avail yourself to this program. What constitutes a financial hardship has seen to be different for different people. Also, the process can take a very long time, up to a year. It is common for the lenders to request documents, and you send them in only to tell you that they need updated forms or that they never received the ones you sent.
It can become somewhat of a headache to keep sending in documents time and again. Another consideration is that if your property is currently already in the foreclosure process, a loan modification will not stop a foreclosure sale.
The lender may tell you that they won’t foreclose upon your property while you are in the loan modification application process, but it has happened where a foreclosure occurred despite these assurances. Typically the loan modification requires you to be behind on your mortgage payments before they will start you in a trial process.
The lender then has you make 3 to 4 trial payments on the reduced amount if you are approved. Once those payments are made then you are considered for a permanent modification. It is entirely possible that you go through the trial payment period only to have the permanent modification denied. At that point you are then stuck with not only being behind on the property, but owing more in late fees and interest than when you started.
It is important to take into consideration all of the factors such as monthly payment amount, credit impact and lawsuit potential when determining what the best option is for you to tackle you debt problems. It is recommended that you speak with an attorney or other professional who has experience in dealing with these types of issues so you can make an informed decision based upon your personal goals and circumstances.
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Bankruptcy as an Option
Although you may not want to file a bankruptcy, our debt settlement attorneys recommend that at a minimum you understand all of your options.
Call us at (303) 688-0944 for a consultation with a debt relief attorney. We can discuss your debt problems and possible bankruptcy and non-bankruptcy options available to you.