Okay, you're probably going to be glad to see 2009 go. You lost income. You gained debt. Cutting out lattes ain't going to cut it when it comes to debt relief. You want to start the new year by getting a handle on your debt. You could be good in the future if you could just get the past off your back--right?
Well, you can. It's won't be easy, but it can be possible. I'm gonna show you a couple of debt solutions that are similar but have some pretty important differences. I'm talking about debt management plans and Chapter 13 bankruptcies.
Chapter 13 Bankruptcy IS a Debt Management Plan
All debt management plans involve you making a single monthly payment to a third party, and that party making multiple payments to your creditors. The idea is that the single payment is supposed to be a lot smaller than the total of all the debt payments, and this is supposed to make it easier for you to manage your debts--hence the name, debt management. The main difference between the two is HOW the decrease in your monthly payment is achieved.
Debt management plans start with the creditors. Your credit counselor goes to your creditors and tries to negotiate lower payments, interest rates, and maybe even lower balances. Then you are given a total payment that you pay the credit counselor each month, which can be up to 40% lower than the total of all of your monthly obligations.
Debt Management Pros
- You minimize credit score damage.
- You could pay less interest.
- Your balances might be lowered.
- One payment simplifies bill-paying.
Debt Management Cons
- Agency fees may chew up savings.
- Forgiven balances are taxable.
- There may be amounts due when the plan ends.
- Debt consolidation mortgages may result in mortgage foreclosure.
- The plan may not be affordable.
- Creditor participation is voluntary.
The main thing to remember with a debt management plan is that the creditors run the show. Make sure that the payment is something you can afford. And if a debt consolidation loan secured by your home is involved, be very very sure that you won't get in over your head--or you'll be taking home equity that could be protected in a bankruptcy and giving it to the unsecured creditors who could be blown off in a bankruptcy. The best case outcome of debt management is that you pay off all of your debt within a few years and experience little or no damage to your credit rating.
Chapter 13 Bankruptcy--The Court-ordered Debt Management Plan
Chapter 13 bankruptcy is administered by a bankruptcy trustee. You make your monthly payment, which is distributed to your creditors as ordered by the court. At the end your your term, usually three to five years, any remaining balances are discharged for good.
Chapter 13 starts with you. A bankruptcy judge looks at your financial position, determines how much you need for reasonable living expenses, and subtracts it from your income after taxes to determine your monthly payment. Your creditors don't get to decide how much they want you to pay, and they don't get to opt out of the plan either--their participation is mandatory.
Chapter 13 Pros
- Debts such as back taxes can be discharged in addition to unsecured debts.
- You probably won't have to repay the entire balances.
- Forgiven debt is not taxable if done in bankruptcy proceedings.
- Creditors can't refuse to participate.
- The plan is created to be affordable to you.
- Creditors must stop charging interest and end collection efforts.
- Debts are wiped out on completion of the plan.
Chapter 13 Cons
- Your credit score may take a big hit.
- The filing is public record for ten years.
- It may make it harder to get jobs, insurance, or loans in the future.
Whatever solution you choose to blow away debt, get good help--no dirtbag lawyers working out of their garages, no sleazy credit counselors who want to help themselves, not you. Many smart people have been successful at debt reduction by trying credit counseling and debt management first and only opting for bankruptcy if they can't get an affordable plan.
