These days it is almost impossible to get through a day without seeing or hearing at least half a dozen commercials offering the magical cure to get you out of debt. However, if you are struggling financially the absolute worst thing a you could do seek financial assistance from the companies running these ads. You are not looking to purchase a Sham Wow or a piece of exercise equipment. Typically when you respond to these offers, you will be talking to some sales person with zero financial education. How is he going to be able to understand and identify your specific financial hardships and help you implement the appropriate solutions? The answer is he can’t, nor does he intend to. His job is simply to sell you whatever he is supposed to sell. Regardless of your problem or circumstances, everyone is sold the same thing.
At Damon Day and Associates, we identify and understand a consumer’s specific financial hardships and overall financial goals, and then educate them on all of the options and strategies that could allow them to achieve success. Making major financial decisions before you have been presented with all of your potential options can be a very difficult mistake to recover from.
Here are some of the main options that consumers struggling with debt need to look into and research before making any decisions.
1. Debt Roll Up (Sometimes called a Debt Snowball)
This is a simple financial concept of utilizing a realistic budget and then applying any excess money toward one specific debt every month. Some people say it is better to pay the debts off in order of size from smallest to largest, giving you a mental boost seeing the debts being paid off faster. Others say it is better to focus on the debts with the highest interest rates first. From a strict financial standpoint, paying off the higher interest debts first, makes more sense, however if you have trouble sticking to a plan then you may be better off focusing on your smaller debts so you can see progress sooner and stay motivated.
The concept is simple enough. Instead of diluting your efforts and paying a little extra on all of your debts, you focus and knock them out one at a time. Pay only the minimums on all of your debts except one. Then using a realistic budget and some self sacrifice, you take every extra penny and pay everything to that one debt until it is paid off. Then you take all that money and move down to the next debt, and so on until they are all paid off.
This is a very effective strategy if with a realistic budget, you have enough cash flow to cover more than the minimum payments every month. If you are in a situation where you don’t have enough cash to cover your minimum payments then this will not be an effective strategy for you.
2. Obtain a Debt Consolidation Loan
Trading one debt for another makes sense in some cases but not all. To take advantage of this option you must first have the ability to take out a consolidation loan or refinance a property. Many consumers find that this is simply not an option especially in this current financial climate. You can also look into borrowing money from friends or family members to pay off your debts, cut up your cards and then focus on paying back the loan in one monthly payment at a lower interest. This option can make sense as part of an overall financial strategy, especially if you are currently paying on high interest rate debt.
3. Do Nothing
You might laugh that I have included this as an option (albeit not a good one). The unfortunate reality is that many consumers end up taking this as a default option simply, because they don’t know what to do. In rare instances doing nothing might actually make sense, but for most people this might seem easy now but it is just going to compound the problems down the road. The debt is not going to magically go away simply because you ignore the phone or don’t open the mail. Don’t wait until you receive a lawsuit to look for help. At that point you have considerably less options available then you do when you first realize you cannot keep up on your payments.
4. Consumer Credit Counseling Service
This is the most familiar option to consumers who are researching the different strategies available to them. Usually these programs are funded by the creditors themselves (doesn’t necessarily make this a bad approach). The general concept is that instead of making the minimum payments to all of your creditors individually, you will make one payment to the CCCS company. They will attempt to negotiate your interest rates down with your creditors and create a plan, usually around 5 years to have all of the debt paid back.
With this plan you will certainly save money over simply paying minimum payments, but many consumers find that they either cannot qualify for a program like this, or they can’t afford the monthly payments to the CCCS company. This is a good option for people that can afford to make the minimum payments on their debts, but have very high interest rates and wish to lower their rates and try to pay the debt down within 5 years or so.
5. Negotiate Settlements with your Creditors for Less than Full Balance.
Unlike CCCS programs where they reduce your interest rate, with debt settlement your actual principle debt is negotiated down. If done correctly (Most Settlement Companies DON’T) you should be able to pay off about 50% to 60% of what you owe and be finished in about 2 years or less. This allows you to pay off the debt much quicker and save quite a bit of money.
This option is not without downsides however. While you are saving the money for settlements, payments are not being made to the creditors. This will result in a large hit to your credit score. Debt Settlement is not a very pleasant experience to go through. It is more like ripping off the band aid, which might hurt, but the pain will go away much quicker. Whether or not this is an effective strategy will largely depend on an individuals specific financial circumstances. Please watch our video about Debt Settlement to learn all of the specific pros and cons of choosing this option to get rid of credit card debt. Debt Settlement Video
6. Bankruptcy
This is typically the option of last resort for most people. If you think this is an option that you need to consider at this time, I recommend you meet with at least two competent Bankruptcy Attorneys. You need to know if you can qualify for a Ch. 7 or will be forced into a Ch. 13. Because of the new BK laws passed in 2005 liquidating everything and starting over fresh with a Ch. 7 BK is not as easy as it used to be. You now have to qualify for a total liquidation.
Many consumers find that even though they are drowning in debt they actually make too much money to qualify and are forced into a Ch. 13 BK. Chapter 13 is certainly not a pleasant experience (of course Ch. 7 is no picnic either) to go through and in many cases will last for 5 years. Essentially it is a forced debt settlement plan that is overseen by the Trustee.
Some consumers find that in a Ch. 13 BK they may still actually have to pay back most if not all of the money that they owe. Meeting with a competent BK Attorney that will educate you on how you will specifically be affected if you file BK is a real eye opener for most people.
Of course there are definite circumstances where Bankruptcy makes the most sense and it is important that a consumer dealing with debt understands how a Bankruptcy will effect them specifically so that they are making fully informed decisions.
It is important for consumers to research and understand each of these options and know which option makes the most financial sense for their specific situation. For example, calling a debt settlement company for a free consultation will not do you any good if you are really in a circumstance that warrants filing a Bankruptcy. The debt settlement sales person is likely not even going to know what the best option is, but they will usually recommend debt settlement regardless of your circumstances. Of course, most of these programs charge thousands of dollars in fees upfront regardless of whether a successful outcome is achieved. Unfortunately as many consumers have learned, making the wrong decision based on bad advice, can definitely be expensive.
