Debt-help options grow with economic challenges

By Andrew Housser

NATIONAL - Today, millions of Americans owe too much. Individuals owe $2.55 trillion in consumer debt -- excluding mortgage debt. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages. With unemployment rates reaching nearly 9 percent nationally, a record-high foreclosure pace, and bankruptcy filings anticipated to be nearly 50 percent higher than in 2008, the nation's economic troubles are clearly hitting Americans' wallets.

Money problems can affect a person's ability to rent a home, purchase a car or even get a job. Most people do not realize they are in too deep until it is too late. You might be in trouble if you answer "yes" to one or more of these questions:

  1. Do you have trouble making even minimum payments on credit card and other debt?

  2. Are you behind on any monthly payments?

  3. Are collectors calling?

  4. Do you juggle credit card balances to pay off other bills?

  5. Do you use credit cards to pay for needs (food, housing, utilities, auto payments) -- and cannot pay off the balance each month?

The good news is that resources are available to help. The right option for each person will depend on his or her individual situation.

First, pay off what you can. Ultimately, you want to charge only what you can pay off in full every month and live debt-free. Meanwhile, to make progress, pay as much as you can on your debt that has the highest interest rate. Stay current with other debts by making minimum payments. When the first debt is repaid, use the same strategy on the next-highest-rate debt. Note: Always make mortgage payments first.

It is best to handle debt yourself to protect your credit score. If you cannot make even minimum payments on bills, call credi­tors and ask for temporary hardship status. Some creditors may work out payment plans. If you cannot manage minimum payments, options for help include:

  • Debt settlement. A debt settlement firm works on consumers' behalf, to lower principal balances due, often obtaining savings of 50 percent of the total debt. The firm does not make monthly payments to creditors, but rather negotiates with the consumer's creditors while the consumer accumulates funds for the settlement. Debt settlement firms charge consumers a fee for their services, typically a percentage of the debt enrolled or a percentage of the debt reduced.

Consumers who stick with a debt settlement plan can resolve their debts in two-three years at significantly lower cost than that of a debt management plan. Debt settlement also typically provides better repayment terms than a Chap­ter 13 bankruptcy filing and does not leave a permanent bankruptcy judgment on one's record.

Debt settlement may have a negative impact on credit ratings and profiles and is best suited for consumers in serious financial hardship who cannot afford to make minimum payments on bills and who cannot afford the higher monthly obligation typical debt management programs require.

  • Debt management. Debt management companies, also known as credit counseling agencies, maintain pre-arranged agreements with credit card companies to lower interest rates on a consumer's existing debt to a creditor-issued "concession rate." Debt management companies collect a monthly fee from consumers, as well as revenue from the credit card companies called "Fair Share" payments.

In debt management plans, monthly payments decrease, but principal amounts owed do not. Consumers who are able to stick with the payment plans typically will pay off existing debt in approximately five years. Debt management plans also require higher monthly payments than debt settlement programs. They are best suited for individuals who are facing a less-severe financial hardship than a typical debt settlement customer.

  • Bankruptcy. Bankruptcy can have a severe negative impact on a filer's credit rating for many years. Under bankruptcy reform enacted in 2005, it is harder to obtain than it used to be, and more expensive. Under the new law, fewer people can eliminate most consumer debt by filing Chapter 7 bankruptcy, taking more people to Chapter 13 filings. Chapter 13 re­quires consumers to pay back debt on a repayment plan (which can take up to five years), while still suffering the negative repercussions of a bankruptcy on their credit report and public record. Generally considered a last resort, consumers considering a bankruptcy filing should speak to a bankruptcy attorney licensed in their state.

Beware of any company that claims its solution is right for you without undergoing a thorough analysis and screening process. Know that as with any type of discipline, facing up to unhealthy debt actually provides great freedom. Act now to build a healthy financial future. With hard work, and possibly some help, you will be able to recover as the economy does.