During a financial crisis, it is important to remember that bankruptcy is not your only option. You should consider several common alternatives. Below we sum up these options, along with pros and cons for each.
Enrolling in a Debt Management Plan
Clearpoint helps people who are overextended through a Debt Management Plan (DMP). The DMP is a debt repayment program that will minimize payments, interest and related fees. It will provide a manageable, tailored plan that enables you to repay 100% of your creditors in full.
A Debt Management Program (DMP) lasts 48 to 60 months. They are ideal for people experiencing financial difficulties. But you must be able to make regular monthly payments on time and in full each month. Skipping payments will result in higher interest rates and penalty fees. Your creditors may also report participation in a DMP to the credit bureau, which could negatively affect your credit rating.
Handling It Yourself
If you have enough income, can budget effectively and feel comfortable speaking with your creditors, then consider dealing with it yourself. To be successful, contact each of your creditors and negotiate a repayment plan. Also, keep in mind that each may respond differently. To get the most from this option, pay close attention to the details and follow each creditor’s directions.
Using Your Assets to Consolidate
You may also use the equity in your home or other assets to pay off or consolidate your debts. With this option, you can take advantage of reduced interest rates, lower monthly payments—plus, the interest may be tax-deductible. The terms and fees associated with these types of transactions vary widely, however, and you should examine them carefully. To qualify for low rates, you need a strong credit score. Understand that by using home equity to repay credit card debts, your unsecured debt will be secured by your home. So, missed payments no longer impact just your credit, but jeopardize your mortgage and home.
Negotiating Debt Settlements
If you can make payments in a lump sum or over a short period, then creditors may accept less than the full amount you owe. Known as settling your debt, you must contact each of your creditors to make a settlement offer. Also, you must have the funds to pay the settlement amount in full.
Before making a payment, it is important to get the settlement agreement in writing from your creditors. Afterward, your remaining unpaid debt may be reflected on your credit report. This amount could be reported as taxable income to the Internal Revenue Service.
Contacting Your Mortgage Provider
Mortgage lenders want you to keep your home. People who miss payments can work with their lender to catch up. If you are behind on your mortgage and do not contact your lender, they may start foreclosure proceedings. Once that process starts, it can be more expensive and difficult to bring your loan up to date.
Contacting the lender offers many options to help you stay in your home—including a repayment plan, mortgage reinstatement, forbearance, loan modification or refinance. In some cases, it may be impossible to keep your home. As a last resort, consider selling your home, a short sale, deed-in-lieu or bankruptcy. Regardless of the option, lenders cannot help you unless you speak with them.
Filing for Bankruptcy
We strongly urge you to visit with an attorney to discuss the benefits, costs and consequences of filing for personal bankruptcy.
Options to Avoid
Often, the stress of financial pressure can cause people to make choices that are not in their long-term interest. We advise you to avoid:
1. Payday Loans and Title Pawn: For a two-week advance, you will pay at least 15 dollars for every $100 borrowed—roughly equal to a 400% annual percentage rate (APR). Many people struggle to repay these debts in full. And those who renew their loans often end up paying more in fees than they borrowed.
2. Predatory consolidation or settlement loans: A refinance of an existing loan or a new home equity loan, these are packed with excessive or unnecessary fees. They carry an inflated interest rate and provide no real benefit. The fees and total closing costs may be more than the amount you received for paying off other debt. Plus, the resulting monthly payments are higher, even though you do not receive additional money. Be sure to read about the pros and cons of dangers of debt settlement.
Pursuing Your Best Option
It can be difficult to determine which course of action is best for you. Luckily, that’s what we do best. Our counselors can provide your credit score, review your credit report and make customized recommendations to you all for free! From there, you will have a clear sense of which option is right for you, and your counselor can clear up any questions or confusion. Ready to get started? Learn more about our budget and credit counseling service.