Probing Into The Risks In Different Options Of Debt Relief

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Choosing any one of the debt relief options is not easy. You will not only need to know the pros and cons but will also need to weigh these against your needs, financial status and affordability. In short, you will need to probe into the different aspects of different types of debt relief. Debt settlement, the most common form of debt relief, involves negotiation with your creditor by you directly or through a third party such as a credit counselor working on your behalf. The process may be completed in a series of negotiation sessions. The primary objective of debt settlement negotiation process involves:

  • Calling up the customer care service of the credit card issuer of the creditor and asking for the relevant person of the department to talk to 
  • Meeting the person and showing that you are really in a bad shape to carry on with your monthly payments
  • Revealing that you have made some arrangements amidst your difficulties to pay a lump sum that is far less than the original amount that you owe to the creditor and if agreed
  • Paying the creditor at one time and get everything in writing so that you are released from any further obligations of the particular debt.

This will erase the debt but the fact you were forgiven a substantial amount by the creditor will be reported to the credit reporting agencies and will be included in your credit history, staying there for as long as seven years!

The Risk In Debt Settlement

Apart from damaging your credit history, there are other significant amounts of risks through the debt settlement company may settle one or more of your debts. It is these risks that you need to consider. The risks are:

  • According to the Pennsylvania credit card debt laws, the creditor has the full discretionary power to deny your offer even after the best of your efforts
  • There are tax consequences as well because the amount forgiven by your creditor will be considered as your taxable income by the IRS
  • Due to the damaged credit history, you will risk your eligibility to get a loan, switch your job or even get a place to stay in the future
  • You will need to arrange for the money to pay to the creditor for which you may have to stop paying them and create a separate account with the debt settlement company
  • This account will be managed by the debt settlement company or a third-party administrator for which you will have to pay fees in addition to the service fees of the debt settlement company
  • If you are in real hardship there is a significant amount of risk of dropping out of the debt settlement program as well which will further jeopardize your debt situation and 
  • If the creditor files a lawsuit against you and wins it they can garnish your wage, tax refunds and even put a lien on your home to recover the amount.

Therefore, craft a proper budget beforehand, follow and review it from time to time to make sure that you are financially able to set aside the monthly amounts required for the full length of your program.

Debt Consolidation Option

This is a debt relief option that you may choose if you wish to lower the cost of credit but not the amount outstanding of your multiple debts. 

  • This process will consolidate or combine all your debts when you take out this large and single loan in the form of a second mortgage or a home equity line of credit. 
  • These loans will typically have a long tenure to pay back making it easy for you with a reduced monthly payment.  

However, this option too has its characteristic risks. 

  • Since you will need to put up your home or any asset of value as collateral, you are the risk of losing it in case you cannot make the payments or are late to pay. 
  • These loans also have costs because in addition to the interest you will have to pay ‘points’ where one point is equal to 1% of the amount that you borrow. 
  • Moreover, since the loan term is longer you will end up paying more in interest to the creditor. 

Even then, a consolidation loan may prove to be better than debt settlement because you will enjoy a few specific tax advantages that are not available with any other kinds of relief options. 

The Bankruptcy Option

Filing for personal bankruptcy is also another debt relief option but ideally, it is considered as the last one. This is because the consequences of filing bankruptcy are long-lasting and far-reaching. 

There are two main types of personal bankruptcy: Chapter 13 and Chapter 7 and each must be filed in the federal bankruptcy court. You will need to pay filing fees that often come up to several hundred dollars in addition to the attorney fees that can vary.

  • Chapter 13 bankruptcy is for people with a steady income. They are allowed to repay their unpaid debts in a revised plan as approved by the court for the three to five years and retain their collateral property instead of surrendering or losing it. You will receive a discharge one you make all the payments as planned.
  • Chapter 7 bankruptcy is a straight bankruptcy where assets that are not exempt such as work-related tools, automobiles, and basic household furnishings are liquidated. The portion of your property may also be sold to recover the amount by an official appointed by the court called a trustee to pay your creditors.

In this process, you will receive a discharge by the court relieving you from paying certain debts but the bankruptcy information including the date of the filing and the date of discharge will stay on your credit report for 10 years. This will make your credit as well as your life difficult.

With all these risks involved, it goes without saying that you will need to consult with an expert before you finalize on any debt relief option.