Consumer Options

Minimum Payments: One choice is to pay the minimum payments to creditors for the next 20 to 30 years. Obviously this is or will be a problem for the client if they currently are or are likely to fall behind on their payments. Making the minimum payments does not eliminate debt and the interest rate could increase over time. Bear in mind that the interest rate could be as high as 39 percent. Based upon the applicable interest rate, the debt could even grow. At best, making minimum payments is like treading water.

Consolidation: Another way to deal with the situation is to consolidate bills into one payment by borrowing the money from a lender. This option may be a problem as well considering the current state of the economy and the unwillingness of banks to lend. In order for this option to be the most effective, the client's credit profile must be in good standing to get a fair interest rate. It is also possible that they may not be able to get a consolidation loan unless they own property with equity. Banks are not readily lending money like they used to. Also, consolidation does not reduce the debts; it just combines them into one single payment.

Bankruptcy: Another option is to file for bankruptcy. Since the passage of the new bankruptcy laws, filing bankruptcy is not as easy as it once was. There are two types of bankruptcy pertaining to consumers: Chapter 7 and Chapter 13.

  • A. Chapter 7 is called straight or liquidation bankruptcy. The court appoints a Trustee who may liquidate or sell some things that the client owns to pay their creditors. Most of their debt will be canceled, but they may choose to pay some creditors, usually to keep a car or home in which the creditor has a lien. If they have any assets that they want to retain, Chapter 7 can have complications. There have been recent changes to the qualification process which have made it more difficult to qualify for a Chapter 7.

  • B. Chapter 13 works much like credit counseling and debt management plans which will be explained in the next section. In Chapter 13, most of the debts are reorganized into a single monthly payment. The payment will continue for 36 to 60 months. The client may not have to repay all of their debt. The minimum payment might be affected by property they want to keep. When they complete the payments, debt not paid is discharged. Some people are opposed to bankruptcy on moral grounds. It is much more difficult to declare bankruptcy than it used to be and bankruptcy is highly regulated with requirements that could be an imposition on the client. Bankruptcy will remain on a consumer's credit report for 10 years from the date discharged and becomes public record for life. Chapter 7 Bankruptcy is included with the RWAL Debt Resolution program, which will be explained in more detail in the next section.

Credit Counseling/Debt Management: Debt Management plans offered through non-profit credit counseling agencies and for profit organizations are another alternative. In practice, if a client enrolls in a debt management program, all of their creditors will agree to a specific plan for them to repay in full. Under this approved plan, each month the client will agree to pay a specific amount of money. The money they pay will be divided up amongst all of their creditors. Interest on the amounts they owe will also continue to accrue. In most instances, it will be at a lower interest rate than they currently pay. If they are in a debt management program, even though they will repay the creditors in full, they will not be able to use any of their enrolled cards. Debt management plans do not reduce the principal amount of debt and the client will continue to have payment amounts close to what they currently have. The client will remain obligated for the entire principal amount. Only the amount of interest and penalties could be reduced and, during the entire time they are in the program, interest will continue to accrue. In the end, they will pay more than 100 percent of the debt. A debt management program will be noted on the client's credit report and will not come off until they complete the program within the 3 to 6 year time span. Not all creditors offer reduced rates for credit counseling and debt management plans. The problem that most clients have with this option is that they will not see payment or balance relief. The monthly payment will typically stay the same. There are also many rules associated with participation including how many times one defaults on a payment while in a program. One will not qualify for Debt Management if they are more than 60 days late with their creditors. Debt Management companies are paid by creditors which sometimes can show a conflict of interest. The failure rate in credit counseling programs is very high and unless they fully complete the program, each of the debts will not go away.

Debt Resolution: Another alternative is Debt Resolution. Debt Resolution is a process where a third party acts on the client's behalf to negotiate the unsecured debt (i.e. credit cards, personal loans, etc.) with each of the client's creditors/collectors to reduce the amount of debt. The process involves the client saving a certain amount of money each month. Out of the money they put aside each month, a portion goes to pay fees, and the rest goes into savings. Once the savings reaches a certain level, a third party begins negotiating with the creditors/collectors. In some cases, depending on certain circumstances, the company may begin negotiating sooner. Once the third party agrees to a settlement, the savings the client has accumulated is then used to pay the settlement. After the first settlement, the process is repeated with the other creditors sequentially until all of the enrolled debts are settled. In order to participate in Debt Resolution, the client must have a genuine financial hardship. Otherwise, a creditor could claim they are attempting to defraud them and that they never had any intention of repaying them. In Debt Resolution, the client has an advocate who is working for them and is not paid by creditors. Completion of a Debt Resolution program is dependent on the client's ability to save funds based on the payment schedule set up for the client.

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