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1. Stop Using Your Credit Cards

This may seem obvious, but the only way to make any headway is to not add another dime to your credit card balances while you pay them down. This means you’ll need to pay for your expenses only with cash as much as possible. You’ll have to do without some things that you would normally charge, but this will force you to be aware of your spending habits. You may not be able to do it 100% at first as you make some adjustments, but you’ll realize that there are many things you don’t really need after all. It’ll become easier to focus only on the necessities, and you’ll be encouraged once you see you’re starting to make some progress towards eliminating your credit card debt.

2. Ask For Lower Rates On Your Cards

If you can also get some lower interest rates on your credit cards, this will help tremendously. Start by calling the ones with the highest rates and asked them if they could offer you a lower rate. Explain to them that you are struggling with paying your bills, even just to make the minimum payments, but that you want to do the right thing and pay your debts. To your surprise some of them may lower your rate significantly, and this will help you eliminate your credit card debt even faster.

3. Take Advantage of Balance Transfer Offers That Make Sense

You may be receiving promotional balance transfer offers from time to time. Analyze each of these offers, noting the interest rate, duration, balance transfer fee and interest rate at the end of the promotional period. If it makes sense and you can benefit from moving the debt, you should do so and focus on paying off the new balance before the promotional rate ends. Applying for new credit might lower your credit score, but the primary goal is to eliminate your credit card debt. You shouldn’t worry about minor damage to your credit, because you aren’t about to try to take on any new debt anyway. Getting rid of your debt will have a credit-improving effect of its own in the long run.

4. Pay Off the Highest-Rate Cards First

Make just the minimum monthly payment on all your accounts except for the one that is charging you the highest interest rate. Funnel as much money as you can reasonably afford toward that account until it is completely paid off. Then do the same thing with the remaining highest-rate account, and continue doing this until they are all paid off.

There are other approaches, however, when it comes to choosing which account to pay the most towards. One involves paying off the lowest balance first so that you can eliminate individual accounts more quickly. The reasoning behind this is that you would gain confidence in doing so and will be more likely to stick with the program.

Another approach is to pay down any account balances, even low-interest ones, to where they are less than 50% of the credit limit on the account. Then after this is accomplished, you can either pay down the highest rate first or go after the lowest balance, as mentioned above. The reasoning behind this approach is that having the balances below 50% of the credit limits will boost your credit score.

However, it all really depends on your priorities. You may decide that your highest priority is to eliminate your credit card debt as quickly as possible and at the lowest cost, not getting a temporary boost to your credit score. If you think that the chances you would be applying for more credit during this time window are slim, then any temporary credit score boost is probably irrelevant. Analyze your own situation and use the method that would be the most advantageous for your personal circumstances and the most effective in paying off your debt.

5. Consider Using Money From Low-Interest Savings Accounts

You may be fortunate enough to have some money in non-retirement savings accounts, and these funds may be earning you very little interest right now (as well as being taxable). Consider using some or all of this money to eliminate your credit card debt. The money will effectively be earning you the high-interest rate of the retired debt. But be aware that you should also consider the need for an emergency fund as well.

You can reason, however, that the credit that becomes available on your paid-down accounts can become your “emergency fund.” Any money sitting in an actual emergency fund can effectively be costing you the highest interest rate on the debt that you can otherwise pay off with it. On the other hand, one or more of your creditors can decide to lower your credit limit, which would also lower the level of your “emergency fund.”

The most important thing is to look at the alternatives and do what you personally feel comfortable with. But remember to include the opportunity cost of keeping a savings account when you consider your options, and also the risk of using the available credit limit on your credit cards as your “emergency fund.”

6. Cut Back on Expenses Where it is Reasonable

Put all your monthly expenses down on paper and take a hard look at them. Decide which expenses you can trim or eliminate without making yourself feel too deprived during the process. At the same time, carry around a pocket-sized notebook (or use a mobile app on your phone) for a month and record everything that you spend money on. You’ll notice some eye-opening realizations that come about from doing this. You may discover that you’re drastically underestimating some of your expenses, and this awareness will help you get a handle on them and free up money to put towards your debt.

One expense to cut back on could be limiting the number of times that you eat out each month. Instead, try to eat more meals at home and bring healthy snacks with you when you’re away. This also has the added benefit of helping you lose the weight that I had been trying to for a long time.

You may also discover that you can live quite happily without certain luxuries, such as expensive cable TV service. Consider your expenses in the light of how much extra money it would actually cost you to not put that same amount towards your eliminating your credit card debt.

7. Increase Your Income

There are many ways you can increase your income, from getting a second job to other creative ways to raise some cash. Some people get frustrated by the fact that they may not make as much per hour on their second jobs, but again I think you need to figure in how much that money ends up saving you in extra finance charges and to mentally add that amount to your actual earnings. Garage or yard sales are another good way to come up with some extra money, and you can also consider selling things you don’t need any more on eBay, Amazon or Craigslist. Again, don’t forget to increase your sales results in your own mind by the amount that it’s also saving you in finance charges. Beyond the dollar amount it saves you, it’s also saving you precious time. Any extra money you can put towards your debt means that you’re helping yourself eliminate credit card debt. How much would that mean to you emotionally to be out of debt a year sooner? You can’t put a dollar amount on that, but the realization that you’re saving time should help motivate you even more.

8. Become A Smarter Shopper

Look for sales on grocery items, stay away from the malls and become very good at price shopping on the internet. You can also consider second-hand items as an option where it makes sense, and save a significant amount by purchasing near-new items such as exercise equipment, CDs and DVDs. You may even discover some nearby thrift stores that carry many items you usually buy for pennies on the dollar. It can also turn out to be a fun place if you have a sharp eye, as you never know what might be showing up there. You might even pick up some items for next to nothing that you would have regarded as unnecessary luxuries, such as high-end audio and video equipment, deluxe book sets and beautifully framed art. You’ll begin to feel like you’re living more lavishly than you were before you cut back on your spending and started eliminating your credit card debt. You’ll also feel more grateful for the good things that you do have.

9. Keep Track of Your Progress

Almost everyone who sets out on a plan to eliminate credit card debt will at some point feel discouraged or even depressed about the task that they’ve undertaken, and may ask themselves if all the sacrifice and effort is really worth it or even possible. That is why it is important to keep track of the progress you’re making along the way. You can refer to it whenever you need to help overcome the temporary emotional lows that may come along.

10. Stay On Course

Make up your mind that you’re going to stick to your plan, no matter what, until all your accounts have a zero balance. Take whatever steps are necessary along the way for you to firm your resolve and keep you focused to see your plan through to its successful conclusion. Set milestones, such as designated debt balance intervals or the elapsed time you’ve devoted to your plan, so you can see how much progress you’ve made and stay motivated.

After you’ve paid off all your accounts and eliminated your credit card debt, promise yourself that you’ll never be careless again about using your credit cards. If you honestly believe that you won’t be able to resist the temptation to overspend with them, then cut them up and learn to live on a cash basis. You may still need to keep one locked up at home in case you ever need to take a flight, rent a hotel room, rent a car or face a true emergency. For these purposes, you should keep the one with the highest credit limit.

What is a Debt Management Plan?

A debt management plan (DMP) is a hardship program offered through either a credit counseling agency or another debt solutions provider. A DMP is geared towards consumers in need of debt relief who require more than simple budgeting to make significant headway on their debt. By taking advantage of the business relationships they have established with creditors, the debt counseling companies that offer DMP’s help reduce the consumer’s interest rates and eliminate fees while arranging for one consolidated monthly debt payment. As a result, consumers begin to see a realistic way forward and can ultimately achieve a more manageable repayment of the balances owed.

When is a Debt Management Plan Needed?

Consumers in these debt situations may need the assistance of a DMP:

• Overwhelmed by too many bills and dude dates
• Excessively high interest rates and fees on debt
• Worried about possible credit score damage
• Self-directed plans to become debt-free have ended in failure
• Harassing collection phone calls are getting under your skin

How a Debt Management Plan Works

There are several steps necessary for a well-designed DMP:

1. Analyze your finances – A debt counselor will collect your relevant financial information and evaluate your current situation. These will include your income, expenses and the details related to your debt. They will assess the nature of your hardship and determine the best available options based on your unique circumstances.
2. Lower your interest rates – The debt management company will notify your creditors that you are working with them to pay off your debt and will obtain interest rate relief on your behalf. They will also pursue the elimination of over-limit and late fees, and are usually successful in bringing collection phone calls to a stop as well.
3. Structure a repayment plan – The debt management company will work out an appropriate repayment plan with your creditors that you will be able to afford, taking your financial hardship into account. The maximum program length will be 5 years or less, so you will become debt-free much more quickly than you would have been able to before.
4. Arrange a consolidated payment – All of your separate debt payments will be combined into one so that you will only need to make a single monthly payment to the debt management company. The company will then be responsible for disbursing this payment on time each month to each of your creditors. You will continue to receive monthly statements from your creditors, so you can track your progress and see for yourself how much faster your balances are shrinking.

Achieving Success with a Debt Management Plan

Here are some important points for you to consider regarding a DMP:

1. Obtain everything in writing. Deal only with a debt management company that will put all relevant aspects of the DMP in writing, and review the details to make sure everything is exactly how it was explained to you verbally.
2. Do some comparison shopping of the fees that the companies charge. Find out all the fees that are involved. You may find that the fees some debt management companies charge are excessive.
3. Accept a DMP you can afford. You should agree to a plan only if you feel confident that you’ll be able to make the required payments when they are due. If it sounds too expensive, check around with some other debt management companies to see if they can offer something more affordable.
4. Make your payments on time each month. Debt management plans do not tolerate late payments.
5. Review the monthly statements from your creditors. Verify that the debt management company is sending the correct payments on time. Notify the company if you’re being charged any fees you weren’t told about.
6. Obtain a written privacy policy from the debt management company. You will have to give them a good deal of personal information, so be sure to protect it.
7. Get the DMP approved by your creditors. Make sure that you receive notifications from each of your creditors that you’ve been approved for the debt management plan.
8. Save all the documentation and emails that you receive from both the debt management company and your creditors for future reference in case you may need to refer to them later.

Does a Debt Management Plan Affect Your Credit?

For each of your accounts in the DMP, notations will be made on your credit report that you’re making payments through a debt management company or credit counseling agency. According to Fair Isaac Corporation (FICO), however, the fact that you are in a DMP will not have an effect on your credit score.

1) Figure Out a Budget That You Can Live With

Buy yourself a small notebook that you can carry around with you all the time, and use it to keep track of all your expenditures for one month. Or you can even track your budget on your phone with a mobile app, such as Mint’s iPhone app. Be sure to include everything from your daily designer coffee to the snack you buy on the way out of the gym. Categorize your spending so that at the end of the month you will have a good idea where all your money is going. Once you know that, you can decide where you can realistically make some cuts that you can live with. How much are you spending eating meals out? Do you still need both the landline and your cell phone? Could you live without cable service for a year and then get in on a good introductory offer? See just how much money you might be able to free up and use toward reducing your debt faster.

2) Use Other Sources of Cash For Paying Down Your Debts

Here’s where you may be able to surprise yourself. If you have money in a savings account earning a low interest rate, it can make good financial sense to use those funds to pay off high-interest accounts. Just make sure you aren’t tapping into your emergency fund or your 401k. You can also use any money you may get from bonuses at work or your income tax refund, rather than using them for other purchases you may have been planning. Decide if you really need that new LCD television, or if you can wait until next year when the prices are probably going to be even lower? And then you can use the money you saved on interest charges to help pay for it at the lower price. Get the idea? Of course, if you’ve already limited your spending as much as you can tolerate, then maybe getting a second job for a while will help give you some breathing room.

3) Pay Down Your Debts the Right Way

When deciding how to allocate your payments on your credit card accounts, make just the minimum payments on all your cards except for your highest interest rate account. Use all the money that’s left over to pay that account down. After it is fully paid off, then go after the next highest interest rate account, and so on. When you do pay off an account don’t close it, as doing this may actually lower your credit score. It also makes sense for you to call each of your creditors and ask them if they can lower your interest rate. Some of them may do this just because you asked, and you have nothing to lose.

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What To Do If You’re In Over Your Head

Let’s say you’ve tried the strategies I’ve recommended and you just can’t make any reducing your debt. Perhaps you’re already behind on some of your accounts and the fees and penalties are racking up fast. Then it may be time to look into a more serious debt solution. Since bankruptcy should be reserved for only extreme situations, you should first explore alternative options to reduce your debt. Educate yourself about both debt settlement and debt management (also known as consumer credit counseling) programs and speak with a debt professional. They can give you a free consultation over the phone and even work the numbers for you to see if it all makes sense.

Debt Solution 1: Debt Management

Debt management plans, which are offered through Consumer Credit Counseling Services, are a major player in the debt solutions industry. They’ve proven to be attractive to indebted consumers primarily because they can help reduce high interest rates. In addition, they can get the consumer debt-free in about one-third the normal time, stop late and over-limit fees, get creditors to re-age the accounts (submit them as “current” on the credit report), offer a single monthly consolidated payment, and protect the consumer’s credit score during the process. Further benefits include providing relief from collection phone calls and assisting the consumer in avoiding a possible bankruptcy. Another benefit, and one that is intended to endure beyond the DMP, is the personalized financial counseling that consumers receive from the credit counseling service prior to their enrollment in the DMP. The counseling not only determines whether there is an actual need for a DMP in the first place, but also educates the consumer on how to budget and stay financially sound long after the DMP has been completed.

Debt Solution 2: Debt Settlement

Debt settlement programs are designed for consumers whose debt problems are even more serious than those that can be handled effectively through a DMP. The resulting credit damage from a debt settlement program is substantial, as is the harassment of collection phone calls from the creditors. The consumer’s debt situation should be desperate enough that these serious downsides are outweighed by the potential benefits of the program. Another downside is the uncertainty that can surround a debt settlement program. The negotiation processes carried out in the program provide no absolute guarantees that the creditors will settle the debts favorably or that the consumer will not end up being sued. Also, the required process in many situations is for the settlement company to take no action on the consumer’s behalf until a specific point in time, which may be 6 months or more after the customer has enrolled and begun paying the company. So consumers essentially pay fees for a period of time, during which they must simply trust that the company is reputable and will act on their behalf at the appropriate time with the creditors. Meanwhile, it is usually during this same period that the creditors will gear up their collections efforts and exert as much pressure as possible on the consumer to pay the money that is owed.

The unsettling nature of this business arrangement for consumers has been a subject of major concern and debate in political circles. The Federal Trade Commission (FTC) is currently working to adopt reforms that would serve to protect consumers and make them less vulnerable to unscrupulous debt companies. When they are realized, the benefits of a debt settlement program can include significantly reduced balances, lower consolidated monthly payments, payoff timeframes of 2 to 5 years, and relief from collection phone calls. For consumers with extreme debt problems, it can be argued that the overall pros and cons of debt settlement are superior to those associated with bankruptcy. However, bankruptcy may be the only debt solution for some, due to the lack of sufficient income needed to fund the required settlement program payments.

In spite of the abundance of information available about debt management advice, there are some myths that persist and are often repeated. Here are some of the most commonly heard myths along with a brief commentary on each:

1. I should just pay off my unsecured debts with my home equity line of credit (HELOC).

Turning unsecured debt (e.g. credit cards) into secured debt (e.g. mortgages) may seem like an obvious answer, but once you examine the consequences more closely you’ll see that it may be a very bad idea. If you’re struggling with your debt, doing this may end up costing you your house, not just your credit.

2. I don’t need to worry about my credit cards. If I need to I can just get a debt consolidation loan.

Debt consolidation loans may have existed at one time, but that time has passed. Even consumers with excellent credit are having trouble getting loans in the current lending environment, so don’t count on this as being your ace up the sleeve.

3. Maybe things will improve and I’ll be able to pay off my balances. I’m not going to do anything.

Inaction is one of the riskiest choices you can make when you have worrisome debt. Most of the time things will get worse, not better, if you continue to do what you’ve been doing. At the very least, you should invest some time to educate yourself regarding your possible debt solutions.

4. I’ll just declare bankruptcy like I’ve heard so many other people do.

Bankruptcy is just one of a number of debt solutions that you can choose from, but it has the most severe negative consequences of them all. A Chapter 7 bankruptcy is much more difficult to qualify for since the new bankruptcy laws were enacted in 2005, and you now will have to pass a new 2-part “means test” in order to even be considered for one. It is likely that you will be forced into a Chapter 13 bankruptcy with a repayment plan instead, and your credit will be ruined for 7 to 10 years. Lawyers also charge higher fees now that they have additional liability to consider in deciding whether or not to accept your case. Bankruptcy is appropriate only when there is no other choice that can be made.

5. A debt management plan will help me to reduce all my debt payments.

The truth is that only unsecured debt can be included in a debt management plan. These debts include credit cards, personal loans, doctor bills and other debts that are not attached to a specific asset. But your other payments, such as your mortgages and auto loans or leases, will not be affected, nor will other types of debts including government loans, IRS taxes and credit union loans. Get in touch with a debt advisor by filling out the online form on the right and they can tell you which of your debts can be included in the program.

Alternatives to Bad Credit Debt Consolidation Loans

Are there any alternatives to bad credit debt consolidation loans, aside from bankruptcy, for those with serious debt problems? The good news is that yes, there are, and there are real solutions for virtually any debt problem. The only caveat is that the debts must be unsecured. The list of items that are excluded: mortgages, home equity lines of credit (HELOC’s), auto loans, government loans, IRS taxes and any debts that are pending lawsuits. But most consumers these days are struggling with credit card debt, and this is exactly the type of debt that these other solutions are designed to handle. In addition to credit card debt, medical bills, collection accounts, auto loans after repossession and other unsecured personal loans are eligible. A consultation with a debt professional can clarify any doubts you may have.

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What is the downside of being in one of these programs? Any bad credit debt solution will have an effect on your credit report. Of course the effects of bankruptcy are the worst, as they can last for 7 to 10 years or even longer. Debt settlement can damage your credit; however most consumers who enter a debt settlement program appropriately either already have damaged credit or likely will have damaged credit in the near future even if they don’t enter a settlement program. Debt management, on the other hand, does less damage to a consumer’s credit report, however it is noted on each enrolled account that the payment is being made through such a program. Some creditors may interpret this information as a positive sign that the consumer takes his debts seriously and is working to repay them, while others may see it as a warning signal that more serious financial problems may be on the horizon. That being said, being in a debt management program has no effect on a consumer’s credit score.

1)  What Does Credit Counseling Entail?

After you have been assigned to a particular credit counselor, they will collect financial information from you so that they can get a good overall picture of your financial situation. Here are some of the financial details that they will need from you:

• Your total monthly income from all sources
• Your typical monthly expenses, in detail
• The current balance on each of your accounts
• The minimum payment on each of your accounts
• The interest rate on each of your accounts

After considering your finances as a whole, the credit counselor will customize a payment plan which is tailored to your circumstances. This proposed payment plan (or debt management plan) is then offered to each of your creditors, who in turn must approve it. Once a payment plan has been approved, the consumer makes a consolidated monthly payment to the credit counseling agency, rather than separately to each of their creditors. The agency then appropriates the correct amount to each creditor in keeping with the terms of the approved payment plan.

2)  How Do I Know If I Need Credit Counseling?

There are certain key indicators which can serve notice to consumers that they probably would benefit from consulting with a credit counseling agency. Here are a few to watch out for:

• You’ve had some late payments and the late fees are beginning to add up
• You don’t have late payments, but you can see it starting to become a possibility
• You have to transfer balances from one credit card to another to stay current
• You find yourself taking out high-interest cash advances
• You are anticipating that you might experience a hardship

As an added note, according to the new bankruptcy laws of 2005, you must attend credit counseling before you will be eligible for filing bankruptcy.

3)  How Can Credit Counseling Help With My Debts?

Credit counseling agencies work closely with the credit card companies in helping consumers to pay off the balances they owe. At the same time, they help the credit card companies collect money they are owed, and also to help avoid the costly consequences if the consumer were to file bankruptcy instead. Because of this close relationship, they usually have established contacts with your creditors who they can work with in getting better interest rates, forgive prior late fees and get your accounts back to “current” status for you.

4)  How Much Does Credit Counseling Cost?

At a maximum, the fees you pay the credit counseling agency should be around 20% of your consolidated monthly payment. As a rule of thumb, your consolidated payment to the agency should be no more than (and hopefully less than) the total of the individual payments you were making before entering the program, interest rate reductions notwithstanding. After all, one of your goals in utilizing a credit counseling agency is to get some measure of payment relief. There are also non-profit agencies, but just make sure you understand that just because they are non-profit, it does not mean that all their services are free. Non-profit credit counseling agencies are regulated by the IRS due to their favored tax status.

5)  Will Credit Counseling Affect My Credit Score?

Your credit report will reflect the fact that you are paying certain accounts through the use of a credit counseling agency. But this information is not taken into account when calculating your credit score according to Fair Isaac Corp. On the other hand, it may affect your ability to obtain new credit. Certain lenders may shy away from extending credit to you if they think that you may be struggling with your monthly bills, while others choose to interpret this information as a sign that you’ve taken responsibility for making certain that you pay your bills.

6)  What if the Credit Counseling Agency Makes a Payment Error?

In this unlikely event, the first thing you will want to do is contact the creditors who haven’t been paid as agreed and explain the situation to them. Be sure to also ask them how the damage can be remedied. Then you should contact your state Attorney General and the local consumer protection agency and inform them of the problem you experienced. You should also check (if you haven’t already) and see if the agency is listed with the Better Business Bureau. If they are, you can file a complaint against them through the BBB’s website. If the credit counseling agency is non-profit, you may want to contact the IRS as well.

Benefits of Debt Settlement

How Does Debt Settlement Work?

The Right Start Debt Settlement Program is one of the most effective solutions available for crippling unsecured debt problems. Our experienced team of negotiators will go to work on your behalf and can typically reduce your debt by 40% to 60% of your enrolled balances, and they will also eliminate any interest charges. To put this in real-world numbers, if your debt is now $20,000 in total, then you may have to repay only $10,000 or even less to your creditors. Many of our clients have been able to become debt-free in as little as 12 to 36 months by making affordable monthly payments, the amount of which they were able to determine by working as a team with their debt counselor.

We begin by working with you to establish what is called financial hardship. Once your hardship is established using various reporting means, we will be able to leverage a strong negotiation with your creditor. We start the negotiation process by contacting each of your creditors and informing them that we will be representing you in an effort to settle your debt. The negotiations themselves can vary significantly from one creditor to the next, but your only involvement will be to approve each acceptable settlement offer that we negotiate. Following your approval, we will obtain the offer in writing from the creditor and will then arrange for the debt to be paid correspondingly. We will continue this process with each of your creditors until you are completely free from all the debts in the program.

Our number one goal is to get you a debt settlement that will ease the hardship associated with bad credit debt. Please complete and submit the form on the right and a debt counselor will contact you. Or you can give us a call right now and speak with one of our experienced and friendly debt counselors at 1-888-590-3939. We’ll be in contact with you every step of the way and keep you informed of all actions performed throughout the credit card debt settlement process. We will make sure that you get started on the road to becoming debt-free as quickly and affordably as your financial circumstances will allow.

How Do I Qualify for Debt Settlement?

In order to qualify for the Right Start Debt Settlement Program, the total amount of your unsecured debt must be at least $10,000 and the balance with each creditor must be at least $750. For your reference, a listing of some common eligible and ineligible debt is itemized below.

Eligible Debt:

Ineligible Debt:

Why Choose Right Start LLC for Debt Settlement?

Right Start LLC has the skill necessary to mediate these negotiations to ensure that you receive the best settlement possible to eliminate your unsecured debt. We have always believed in making our clients’ best interests our highest priority, and we will always continue to do business with integrity as our guiding principle. In an industry in which many companies expect you to take their word for what they say about themselves, we offer our prospective clients something we think is much better: the 3rd-party customer feedback compiled through our association with the Better Business Bureau. We think you’ll agree that this amply demonstrates our unflinching commitment to doing the right thing for our clients. We look forward to the opportunity to use our knowledge, expertise and diligence on your behalf to help you to meet your financial goals.

Debt Settlement Education

For additional information, you can read these helpful debt settlement articles:

Understanding Debt Settlement

Will a Debt Settlement Program Damage my Credit Score?

How Much Does a Debt Settlement Program Cost?

More Articles…

The first thing you need to consider is that debt settlement can be a long, drawn-out process which requires a mix of patience, persistence and knowledge. Some creditors may not be interested in negotiation at all, and instead will simply use your call as an inbound debt collection opportunity.  You will need to be firm but cordial about your intentions to settle the unsecured debt, while at the same time making sure that you don’t sound too eager. This may prove to be challenging, as some creditors will use scare tactics or just flat-out refuse to negotiate. A lot of individuals are unaware of their consumer rights, so many creditors use this to their advantage and attempt to intimidate consumers. Be sure to always know your consumer rights, which you can learn about by reviewing the Fair Debt Collection Practices.

If you feel like you can’t move forward, don’t lose your cool. End the phone call politely and try calling them again at a later date. It’s not uncommon for creditors to remain firm during the early contacts. Resolve to be patient and just accept the fact that the process may become tedious and time-consuming, and be prepared for the possibility that particular creditors ultimately may never agree to negotiate with you at all. But do make sure that when you do speak with a representative, take good, detailed notes to refer to later on.

Another important consideration involves how to handle situations in which the creditor makes a debt settlement offer. Normally it isn’t a good idea to accept their first offer. Instead, tell them that you need time to consider their offer or to discuss it with your spouse, and arrange to speak with them again in the next day or two. When you speak with them again, counter with a lower debt settlement amount and explain that you are in a severe financial hardship (and never another explanation). If they seem unwilling to give you a better offer, let them know that theirs is just one of several accounts that you need to settle, and that you are negotiating with them in good faith in order to avoid having to declare bankruptcy. If they do make what you think is a good offer, always ask them to send it to you in writing. Then read what they send you very carefully to verify that it’s accurate before sending them any money.

Lastly, you need to consider the possible consequences of handling your own negotiation process poorly. Not only will you likely not receive a good debt settlement offer, but you may also jeopardize the situation for anyone (including a professional debt counselor) to come along later and try to clean up your mess. Accept the fact that a creditor is more likely to negotiate with (much less speak with) a debt professional who may represent dozens of accounts or more to them, than they are with you when you represent only a single account. Therefore, a debt counselor with experience and knowledge and established contacts at each creditor will be more likely to obtain a better debt settlement offer. He will also be able to recognize a truly good offer when one is finally put on the table.

While this discussion is not meant to be comprehensive of all the aspects of handling debt settlement yourself (even a book on the subject would likely omit some details), it should serve as a cursory overview for those who may be looking to save themselves the costs of enrolling in a debt settlement program.

Many consumers have opted to enroll in consumer credit counseling services (also known as debt management) in an effort to eliminate their debt problems. While this type of debt solution does offer some benefits, it isn’t necessarily the one that many of these consumers really need to most effectively resolve their debt problems. While it may be a preferable alternative to declaring bankruptcy, credit counseling does have some weaknesses, especially when it’s compared to the benefits offered by a debt settlement program.

Credit counseling can benefit the consumer in several different ways. First, it can offer a single consolidated monthly payment, which simplifies the bill-paying process and offers a measure of relief for those who have trouble organizing all the due dates and payments of each individual debt. Second, it can provide some interest rate relief by reducing the rates on each account. Third, it can reduce the total monthly amount paid on the debt. And lastly, it can provide the consumer with some relief from the harassing debt collection phone calls which can plague past-due account holders.

Debt settlement, in comparison, provides a much higher degree of assistance to the cash-strapped and debt-laden consumers who may be searching for the right debt solution. Just like credit counseling, debt settlement provides both a consolidated monthly payment and relief from debt collection phone calls. But that is where the similarity ends.  A debt settlement company will negotiate the balances owed on each account, typically resulting in a 40% to 60% reduction of the overall unsecured debt. Further, interest rates and late fees are completely eliminated. The end result of these benefits is perhaps even more significant: the consumer can become totally debt-free in a small fraction of the time it would have taken if the debt had been enrolled in a credit counseling program instead. As an additional benefit, it even allows the consumer’s credit score to recover more quickly as well.

• Simplification of the monthly bill payment process
• Reduction in the overall interest rates paid on the debt
• Reduction in the total monthly payment on the debt

The first of these is beneficial for those who are always having trouble keeping track of their individual payments and due dates. But the second advantage is usually the main selling point of debt consolidation programs. Consumers who are candidates for these programs are usually paying excessive interest rates and see reducing their interest rates as the principal goal. However, it is the third advantage that consumers should focus on when choosing among possible options to consolidate debt. In many cases, a debt consolidation company can reduce the overall interest rates on the debt, but the actual debt load itself may change relatively little once their fees are calculated into the total debt equation.

Debt settlement, on the other hand, also delivers the advantages of a debt consolidation program, but to a much greater degree. In actuality, debt settlement is a form of debt consolidation, but with some crucially important differences. The principal benefits of debt settlement over debt consolidation are:

• The balances on the unsecured debts are negotiated.
• Interest charges and late fees are eliminated.
• The consumer can become totally debt-free in a fraction of the time.

As you examine each of these benefits in detail, it becomes clear that debt settlement offers consumers a much more powerful means to free themselves from unsecured debt than typical debt consolidation programs. The debt balances are normally negotiated to 40% to 60% of what would otherwise be repaid in debt consolidation, and the interest charges are totally eliminated rather than being reduced. But even more importantly, debt settlement achieves vastly superior debt relief by offering a comparatively brief process toward realizing the goal of becoming debt-free.

Get in touch with a professional debt counselor today to find out which debt relief program is right for you, as there is no “one size fits all” solution for debt problems. They will analyze your unsecured debt in the context of your overall finances and recommend the debt relief solution that best meets your needs. A brief consultation is all that’s needed to get you started on the road to financial freedom.

Hopefully some basic information will set your mind at ease, or if not, will motivate you to take charge of the situation and seek an appropriate solution.  If you are heading towards an impending debt crisis, the worst thing you can do is to do nothing at all, as financial problems tend to get worse, and sometimes very quickly, if they aren’t understood and dealt with promptly and effectively.

One of the most important financial assessments a consumer can make is to determine if they are carrying too much debt. Many consumers are dealing with reduced hours at work or a loss of overtime pay, while others have been under-employed for some time. In these and other even more trying circumstances, an out-of-control debt problem can bring about a financial crisis. All too often, the warning signs are disregarded and the situation becomes more serious before any action is taken. Here are some of the warning signs you need to pay attention to:

• You are taking high-interest cash advances from your credit cards to cover basic living expenses
• Twice or more you were late in paying some bills
• You are beginning to make only the minimum monthly payment on some of your credit cards
• You find yourself paying punitive late fees fairly regularly
• NSF (non-sufficient funds) charges from your bank are beginning to appear on your statements
• Your fixed monthly expenses, such as for mortgage or rent, car payments and insurance, are becoming increasingly difficult to afford
• You find yourself transferring balances from one credit card to another with some regularity
• Unexpected expenses, even relatively minor ones, cause a crisis when they occur

If any of these sound too familiar, you probably need to begin looking into possible debt relief help. The debt relief solutions can range from mild (budgeting and reducing unnecessary expenses) to severe (bankruptcy). Most people fall somewhere in-between these two extremes and get debt relief from debt consolidation, debt management/credit counseling, or debt settlement. Explore these debt relief options and find the solution that is the most suitable for your debt problems.

To clarify the point, you need to understand that all the non-profit debt relief companies we are referring to are debt management companies (a.k.a. consumer credit counseling companies). And debt management companies are only one of five possible debt solutions available to the consumer. So the a priori choice of a non-profit company is a case of “putting the cart before the horse”. By choosing in favor of the non-profit, you are limiting yourself by blindly choosing only one of five possible debt relief solutions.

What are the five debt relief solutions from which to choose? In ascending numerical order of the severity of the debt problem, the choices are:

1. Discipline and Thrift
2. Debt Consolidation
3. Debt Management or Credit Counseling
4. Debt Settlement
5. Bankruptcy

Now that you’re beginning to see the big picture, it should be clear that your most important task is deciding which of the above five debt relief solutions is right for you. Only if that choice happens to be debt management will the issue of profit status enter the picture. However since only debt management companies are non-profit companies, it is a moot point and contributes nothing toward narrowing your company choices any further.

You may also be interested in why it is that some debt management companies are non-profit. The reason is that they are required to provide free counseling and education services as well as put a cap on the fees that they can charge for their programs. Being organizations that are exempt from normal corporate income taxes, they fall under the regulation of the IRS.

Just one final note that bears mentioning: the non-profit status of debt management companies does not mean that their programs are free.

Whether this failure is a result of poorly written bankruptcy law or simply an inescapable consequence of the severe downturn in the economy at large is currently the subject of intense debate. The 2005 reforms have its share of critics among legal scholars, and no one would argue that the spike in foreclosures and job losses doesn’t contribute directly to the bankruptcy numbers. But regardless of the outcome of that debate, Americans are turning to bankruptcy as a debt solution much too often and very likely are overlooking the benefits of debt settlement program as a less drastic and possibly more appropriate debt solution.

Filing bankruptcy has such a steep downside that only the most severe debt problems will warrant its use. Personal bankruptcy will stay in your credit history for 7 years and its effects on your credit score can last for as long as 10 years. In contrast, a properly administered debt settlement program will negatively impact your credit score for only one to three years, after which time your score should rise steadily. And although your debts will not be discharged as in a Chapter 7 bankruptcy, they normally are settled for 40% to 60% of the balances and the payments become affordable. Usually your debts will be fully paid off within a few years, and this is accomplished with payments that are only a fraction of the total minimum payments that likely are keeping you in a debt crisis.

In short, it is advisable to speak with a reputable debt settlement company, such as Right Start Financial, before making the decision to file for bankruptcy. You may discover that, as a vehicle that enables you to get past the financial hardship you may be facing, a debt settlement program balances the rewards and penalties more appropriately than filing bankruptcy.

If the aforementioned statements are a reasonably accurate description of your own analysis, then you’ve properly assessed what your best debt relief options are likely to be. Your debt crisis is severe enough that the benefits of these debt relief solutions outweigh the credit damage (albeit short-term with debt settlement) that will ensue. So now let’s take a little closer look at each of these two remaining options and get a better understanding of why someone might make an informed choice in favor of either credit debt settlement or Chapter 13 bankruptcy.

In a debt settlement program, your balances will typically be reduced by 40% to 60% and you can completely pay off your unsecured debts in just a few years or even less, depending on if you are able to allocate more than the required minimum payments of the program. You will stop paying any interest at all on your debt, so the entire monthly payment you send to the debt settlement company will go toward paying off your principal balances, less any fees the company charges for the debt settlement program itself. Consider the possibility that if you are currently making just the minimum payments on your credit cards (and continue to do so) and your interest rates are high, it may take you 25 to 30 years or even longer (depending on just how high your rates are) to eliminate your debt. Clearly there are substantial benefits available from a debt settlement program.

When even these benefits are not sufficient to realistically get you free from your debts, then you may have to opt for a Chapter 13 bankruptcy. By going this route you must pay the heavy price of severely damaged credit lasting as long as 10 years or more, plus pay attorney fees and commit to a repayment program lasting a maximum of 5 years.

If the penalties of Chapter 13 bankruptcy are just too severe for you to tolerate, you may be better off choosing debt settlement. On the other hand, if the financial assistance you need is even beyond what debt settlement can provide, your best decision may be to bite the bullet and find a good bankruptcy attorney.

Basically there are 5 debt relief solutions to choose from to help eliminate credit debt, listed here in ascending order according to the severity of the debt problem:

1. Discipline and Thrift – reduce your expenses wherever possible and save more money toward paying off debt. May improve your credit score.
2. Debt Consolidation – refinance your home or take out a home equity line of credit (HELOC) and use the money to pay off your unsecured debt. Generally no negative effect on your credit.
3. Credit Counseling (a.k.a. Debt Management) – can lower your interest rates but will not reduce the amount you owe to your creditors. Minimal negative effect on your credit.
4. Debt Settlement (a.k.a. Debt Negotiation) – can reduce your unsecured debt significantly, lower your monthly payment and get your debt paid off quickly. Moderate but temporary damage to your credit.
5. Bankruptcy – for consumers with no other viable option. Severe long-term damage to your credit, other possible ramifications.

Photo by Andres Rueda

A credit counseling service establishes a planned method of debt relief for consumers. This involves educating them on how to properly manage and budget their money as well as arranging for them to pay off their debts through a debt management plan (DMP). This is why “credit counseling” and “debt management” are often used interchangeably.

In a DMP, the credit counseling organization acts like a middleman between you and your creditors. They collect monthly lump sum payments from you, which they then disperse to your creditors until all your debts are cleared. The credit counseling organization will also contact your creditors and explain to them that you are enrolled in a DMP.  Creditors may agree to reduce interest rates and waive certain fees and late payment penalties if you are repaying through a DMP.

How a Credit Counseling Service Makes Money

The lower rates are not arrived at individually through negotiation (as in debt settlement), but instead are predetermined according to a set formula if the credit counseling company is already well-established. So if the debt management companies don’t have to negotiate on your debt, then on what basis do they make their money? There are two ways that they make their money:

1. From the consumer – they charge a monthly management fee and an initial set-up fee for the services they provide for the consumer.
2. From the credit card companies – they receive payments for getting the consumer to pay the full balances that they owe.

Overall, a credit counseling service is the debt relief method preferred by the credit card companies as it involves full repayment of the balances owed to them. In contrast, debt settlement programs significantly reduce the balances owed to the credit card companies, which for them is obviously a much less desirable outcome. Credit card companies try to collect the full balances owed through their association with consumer credit counseling services.

For more information on debt management plans, please visit:
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm


This post has been featured in the Carnival of Debt Reduction.

Right Start Financial has a team of experts that specialize in finding the right debt solution to even the most serious debt problems. They will analyze your overall financial situation and determine the solution that should work best for you. And even if your unsecured debt is not overwhelming, we can still advise you about programs available that are designed specifically for your situation.

A brief discussion of debt settlement services should give you a better idea of some of the factors involved in the decision-making process. A debt settlement company will negotiate with your creditors on the balances that you owe. In most cases, they can negotiate a 40% to 60% reduction of your unsecured debt and have you debt-free within just a few years. In contrast, if you are currently making minimum payments on your accounts and have high balances and interest rates, you probably will be paying off your unsecured debt for 25 years or even longer. Obviously, this is a tremendous benefit to you. So there must be a corresponding downside to debt settlement programs, as there is with any credit card debt relief solution.

Why would your creditors be willing to negotiate? In order to do so, they must believe that it represents their best opportunity to receive any money at all from you. So you will need to stop making payments to each of them, and instead begin making a single consolidated monthly payment to the debt settlement company. They will accumulate your payments in a trust account, from which only you can authorize payments to your creditors.

Since you will stop paying your creditors, your credit score will suffer in the short term, but not nearly as much as if you had chosen bankruptcy as your debt solution. And here is where fitting the proper debt solution to the given situation comes in. Maybe your debt crisis is not serious enough to warrant the downsides of either a debt settlement program or bankruptcy, and instead debt management (a.k.a. credit counseling) is a more appropriate mix of reward/penalty. There are still more debt relief options, but at this point you should already be able to see that a debt settlement program is just one of several possible choices from which to select. Your best move is to get in touch with a debt counselor and seek professional credit card debt advice, as the factors they will consider go far beyond the scope if this introductory article.

First, debt consolidation can refer to a situation in which a consumer has more than one debt, for example several credit card accounts, a couple of loans or a mix of the two. If the interest rates on these debts are high, the consumer may opt to take out a lower-interest loan (by refinancing his home, taking out a line of equity, etc.) and use the proceeds of the new loan to pay off the individual debts. The consumer has consolidated his debts into a single larger loan, and now makes a single monthly payment toward the new consolidated amount. This new monthly payment will usually be lower than the combined payment amounts of the original debts, will take advantage of some other aspect of the situation (e.g. income tax deductibility), or both.

Second, debt consolidation can refer to a situation in which a consumer seeking debt relief obtains professional assistance from a debt solution company. These companies will, among other duties, assume the task of effectively bringing together the consumer’s debts and combining them in such a way that the consumer will make only a single monthly payment. The payment will be made to the debt solution company, who will in turn pay the individual creditors. In this instance, the consumer is making a consolidated payment toward the individual debts; however, the debts themselves are in fact still separate and have not been consolidated.

It is also important to understand that there are different types of debt solution companies that use a variation of the second form of debt consolidation just discussed. A debt management company (a.k.a. consumer credit counseling) will offer the consumer a consolidated payment. The payment will be based on the full amount of the debts involved and any interest charges, as well as the cost of the program itself. A debt settlement company will also offer the consumer a consolidated payment, but the monthly payment will be based on the combined negotiated amount of the unsecured debts involved, as well as the cost of the program. Lastly, even a Chapter 13 bankruptcy filed by an attorney will involve a consolidated payment to the trustee toward the debts included. Of course the attorney will charge a separate fee for his services.

How do you know which credit debt solution to choose? Ask yourself these initial questions:

1. Are your monthly debt payments totally unaffordable and overwhelming given your current income level? Consider a debt settlement program

Many people find themselves in the situation of only being able to afford to make minimum monthly payments toward their unsecured debt (i.e. credit cards). Unfortunately this approach to get out of debt is extremely costly, and worse, you find yourself making very little headway on paying off the principle balances of those debts. So you may be treading water but land is not on the horizon. For those who find themselves in this situation, you need the debt relief offered by debt settlement companies in order to make some significant progress towards paying off those balances.

2. Is your financial situation not as hopeless sounding? Can you see a way out of your debts with some moderate assistance? Are you paying down your balances, but they are still formidable and you think you might run out of steam before you’ve been able to pay them off completely? Consider a debt management program
   • Your credit score will fare much better, as your balances are paid in full through the assistance of lowered interest rates.
   • Because the balances are paid in full, the credit card companies are much happier with this arrangement and will not subject you to the harassment that can accompany credit card debt settlement programs.
   • The fees involved in their programs normally are lower.
   • Because many of the debt management companies are non-profit agencies, they also provide budgeting, education and financial counseling assistance along with their core function of managing and consolidating monthly debt payments.

Debt management counseling, also known as consumer credit counseling, is a preferable solution, and you can avoid some potential problems of debt settlement services.