Debt Decisions
By: Debt & Credit Hotline
Summer 2021 (Vol. 39, No. 2)
Q: A debt consolidation company offered me much lower monthly payments to consolidate my total debt. But now they are saying they will have to negotiate a lower balance on each of my accounts. Will this affect my credit score?
A: Yes. Beware of debt settlement companies masquerading as ‘debt consolidation’. Anytime you negotiate to pay less than the total amount due, this is called debt settlement. If this is really what you want to do, you can probably do it yourself cheaper by going directly to the credit card companies.
Q: A debt settlement company told me the process won’t hurt my credit much. Is that possible?
A: That depends on your current score and circumstances. On average, debt settlement can initially lower your credit score by at least 100 points. However, it is not the settlement that hurts your credit the most, it’s the missed payments that precede the settlement. It is rare for a creditor to negotiate a settlement with someone who is making their payments as agreed. The debt settlement strategy involves you making zero payments to your creditors for six months or more to force the creditor into negotiating a settlement.
If you have a high credit score, defaulting on even one credit card payment can drastically change your ability to get credit. However, if you have already missed several months payments on your debts, then the damage is already done and settling your debt for less than owed isn’t going to change your credit worthiness much. The missed payments will remain on your credit for seven years from the date of your first missed payment but you can typically start rebuilding in around three years. In summary, only you can decide if your need for good credit outweighs your need to eliminate debt.
Q: Are there any options for settlement that will help me lessen the impact to my credit score?
A: Establishing a debt management plan with a non-profit organization could be a viable option. Free credit counseling services such as www.ConsumerCredit. com provide resources to help you negotiate a more affordable payback. You probably will not see as much debt relief, but the tradeoff is you should be able to salvage more of your credit.
You can find free or low-cost credit counseling options thru many sources including credit unions, religious and other nonprofit agencies. or even a place where you have been denied credit such as a mortgage lender. Make sure that your credit counseling service is accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA)
If you are active-duty military, the Servicemembers Civil Relief Act (SCRA) can assist. Under this act, they may qualify for a reduced interest rate on mortgages and credit card debts. It can offer protection from eviction. It can also delay civil court including bankruptcy, foreclosure, or divorce proceedings. To find out if you qualify, contact your local Armed Forces Legal Assistance office.
Q: How do I file bankruptcy?
A: Federal courts have jurisdiction over all bankruptcy laws, so you must file a petition in a federal bankruptcy court. You can find fillable, downloadable forms online on the U.S. Bankruptcy Court’s website at www.uscourts.gov/ forms/bankruptcy-forms You can file yourself but the bankruptcy and petition process is complicated, so it can be difficult to file without an attorney.
There are two main types of personal bankruptcy:
Chapter 13 allows individuals with regular income to keep their assets and develop a plan to repay all or part of their debts. Under this chapter, debtors propose an affordable repayment plan to make payments to creditors over three to five years.
Chapter 7 is known as straight bankruptcy. It involves liquidating all assets that are not exempt under federal or state law. That means, your home and other assets could be sold and the proceeds used to pay creditors.
You will also need to provide detailed financial information including itemized statements of monthly net income and proof of income (pay stubs) for the last 60 days. You are required to provide tax returns for the preceding year (four years for Chapter 13 bankruptcies). You will also have to take a pre-filing credit counseling and post-filing education course to have debts discharged.