People who need help
getting out from under debt have a number of choices, each with some advantages
and pitfalls. Here's a broad overview.
Nonprofit credit counseling What: Long-term repayment plans called "debt management plans." How it works: A counselor evaluates your finances, helps devise a budget,
pays bills out of a monthly payment you make; may arrange breaks from creditors
and bring delinquent accounts current. Pros: Budget help, financial education; reduction in interest rates and
late fees; maximum fee of $50 a month, which may be reduced based on need. Cons: Can take three to five years; about 20 percent to 50 percent success rate;
no reduction in principal amount due; credit cards closed or suspended during program. Protection: Check whether IRS nonprofit status has been revoked and look for membership in the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
Debt settlement What: Negotiated settlement of existing debts. How it works: You pay a monthly amount into escrow instead of paying
creditors. Company negotiates lump-sum settlements with creditors for a portion
of balance due. Settlement company cannot legally take fees until the settlement is
accomplished (though settlement companies organized as law firms may charge upfront). Fees vary widely, up to 40 percent of the erased debt. Pros: May reduce outstanding balances, if successful. No fee until debt
reduction accomplished. Cons: Likely to trigger
collection action or lawsuits from creditors when you default on debts;
negative entries on credit reports; success rates disputed; debt forgiven is
subject to tax; scams are a danger. Protection: References provided
by American Fair Credit Council. Also check
state regulatory agency and Better Business Bureau to avoid scammers.
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Bankruptcy (Chapter 13) What: Court-supervised repayment and partial discharge of debts for
people receiving steady income, and whose unsecured debts are less than about
$360,000 and secured debts are under $1.08 million (adjusted annually). How it works: After completing pre-bankruptcy counseling, you or your
lawyer files a petition with the bankruptcy court. If approved, you enter a repayment
plan lasting three to five years. A trustee takes your monthly payments and
distributes money to creditors.
Pros: Unsecured debts are partly erased; collection actions and lawsuits
are frozen; you may save your home from foreclosure and stretch out some debts
secured by property. Cons: Legal and court fees, extensive documentation required; relatively
low success rate; credit reports will show bankruptcy for 10 years. Protection: To find a bankruptcy attorney, check with the state or local
bar association and National Association of Consumer Bankruptcy Attorneys.
Bankruptcy (Chapter 7)
What: The sell-off of assets
to repay creditors in a court-supervised process; often the result of a failed
Chapter 13 repayment effort. How it works: As in Chapter 13, the debtor files a petition in bankruptcy
court, which conducts a means test based on your income. If approved, the court
sells assets to pay creditors, except for property covered by special
exemptions under federal or state laws. You turn over lists of assets and debts
to the court, and a trustee notifies creditors to halt collection.
Pros: Freezes collections, lawsuits and wage garnishments. Discharges
unsecured debts without repayment.
Cons: Results in loss of your property, except for basic living items; does
not erase some debts including child support, taxes and government-backed
education loans. Credit reports show bankruptcy for 10 years, and individual
lenders may deny you credit even longer. Protection: To find a bankruptcy attorney, check with the state or local
bar association and the National Association of Consumer Bankruptcy Attorneys.
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