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The differences between Debt Settlement, Debt Management and Debt Termination!

Published by admin on December 18, 2009

The differences between Debt Settlement, Debt Management and Debt Termination!

When you have more than a mountain of credit card debt, stress can start to be very overwhelming from time to time. The collection calls are becoming a daily harassment, the rude bill collectors and nasty letters all add to an already intense and stressful situation. The consumers that are faced with this kind of pressure will naturally seek out the services of the professional debt consolidation companies. But to find reliable assistance can actually add up something more to the stress! For example, just type “debt help” on any search engine and you’ll see page after page of results. There are literally thousands of debt companies out there. How to choose? How to tell the scams and schemes from the legitimate services? Should you contact a non-profit credit counselor? One company says that they can cut your bills in half. Another outfit says you really don’t owe any money to the banks at all, and they can wipe away the debt for you. Who should we believe? Where do you turn?

Consumers face a bewildering array of options when seeking debt assistance. As with any service, when considering a debt reduction program, “let the buyer beware.” Yes, there are some good debt companies out there. But many are only in business to take your money and nothing else. Some actually leave you much worse off than the moment when you started to use them.

Where to start? Let’s categorize the various types of debt program. This will cut down on the confusion and help you decide where to start your search for a good debt consolidation company. I assume that you are trying to avoid bankruptcy. I’m also assuming that you’re struggling every month to keep a pace with your creditors by making the minimum payments on your debt and obligations that have fallen behind or are starting to fall behind. Further, in the following, I presume that you can’t mortgage your home or otherwise pay off your debts. In other words, we’re talking about a financial rescue package situation.

To simplify things, let’s look at debt business in terms of three rough categories:

1. Debt management plans require 100% repayment of debt through a structured payment schedule. That is what non-profit credit counseling agencies do, and for-profit debt consolidators.

2. Debt relief, debt settlement or debt negotiation plans require payment of a portion of the debt what you owe, usually around 50% or less, while the rest is going to be forgiven by the creditor. Almost all these companies operate on a for-profit basis.

3. Debt termination companies claim to wipe away 100% of your debt through special legal procedures, so your total payment consists only of their fees.

Right off the bat, let’s start by crossing # 3 off the list. Sorry, but this is a scam. You can recognize this type of company very easily. They claim that just to lure you and to take some money out of your pockets since this is not how our monetary system works. Their system is based on the mistaken belief that credit card banks are operating illegally by extending the credit to you. Absolutely do not give your money to any of these outfits! The fees start at $ 2500 and go up from there. I spoke with a guy who lost $ 15,000 in this scam.

People that are in debt should always know that there is no free lunch. The only thing as “debt arbitration services” do is to make money. Their legal theories are total nonsense, and the courts do not recognize their arguments. These are the same people who also claim you don’t have to pay income tax either. As tempting as it might be in case you are going to try one of these services, you’ll just get yourself in deeper trouble your creditors.

That leaves # 1 (debt management plans) and # 2 (debt settlement). Debt Management Plans (DMPs) are offered through the Credit Counseling companies and tend to operate a non-profit company. So these are non-profit companies that use a similar business model. The key idea is that you can write one monthly payment to the Agency, and they in turn distribute the money to creditors. The business DMPs work with creditors to lower interest rates so that more money goes to pay off the debt. You should also know that there are fees involved. Non-profit organizations are not free – this is point often confuses consumers. The “profit” does not mean the company is all very well what they are doing. Sometimes, a non-profit company can afford to provide quality services because they can pay staff wages! So don’t automatically think that the non-profit services are good or that the non-profit services are bad.

When should you consider enrolling in the DMP? Although many financial advisors seem to think that DMPs is the answer to all the debt problems, the reality is that business firms, in principle, operate as collection agencies for banks. In the real world, the DMP is reasonable only if you have a relatively short-term financial crunch. Let’s say you are between jobs, but we know that your earnings are better prospects for 6-12 months. DMP makes sense in such a situation, because it would provide temporary assistance that is needed before you can re-export bills and start paying down the debt faster. On the other hand, if the situation is a long term one, and you don’t see the light at the end of the tunnel, then more aggressive approach might make perfect sense.

Debt settlement and debt negotiation may offer a more aggressive approach to debt reduction, that it makes sense for many consumers. It should be considered as an alternative to bankruptcy. In fact, it’s a very good alternative to bankruptcy under Chapter 13 in particular. ( In case you want a detailed comparison of debt settlement, and in Chapter 13 bankruptcy, see www.new-bankruptcy-law-info.com.) It will also give consumers the opportunity to work in a small way out of serious debt problems and it is not aware of the failure and loss of privacy, the moment you will go bankrupt. One of the best features of Debt Settlement agencies is that it relates to reducing the debt to equity (total debt), not only of interest like it happens with the DMPs. The result is a much faster way out of debt. It’s also much more flexible than other programs because it’s the only approach that allows changes upwards or downwards on your monthly financial commitment. That’s particularly important to consumers especially during the unstable economic times like right now.

Debt settlement program is not a perfect solution though. One major disadvantage is that fees are usually very steep, often 15% or more of the initial level of debt. Settlement also has a negative impact on your credit score (even if you take out a loan also hit the DMP). So this means that you are not going to improve your credit score with a debt settlement strategy. However, when viewed as an alternative to bankruptcy rather than cure-all for financial problems, which provides a good solution for many consumers. In essence, debt settlement is really nothing more than negotiating a compromise with creditors. It’s actually a win-win scenario for you and your lender.

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