Debt Relief

Debt Relief: Understanding the Options and Consequences

debt relief

Debt relief can ease the burden of overwhelming financial pressures. People with debt are more likely to face mental health issues, including prolonged stress, anxiety, and depression. To break free from the financial burden of debt, several different debt relief options are available for consumers. However, debt relief programs are not the right answer for everyone, and it is important to understand the implications, including both the positive and negative aspects of each form of debt relief before proceeding.

When to seek debt relief

One important consideration to keep in mind is when to seek debt relief. Debt relief, including both debt management and debt settlement, should be considered when the consumer is struggling to repay his or her unsecured debts, including credit cards, personal loans, and medical debt, within five. Debt relief should also be considered if the total of the consumer’s unsecured debt equals half or more of his or her gross income.

When to consider filing bankruptcy.

Filing for bankruptcy is a complicated process and a decision that should not be taken lightly.  But for some, it is the only solution that will get them out of debt and serious financial problems.  So how do you know if bankruptcy is right for you?  It can be difficult to determine whether it is the right time to file for Chapter 7 bankruptcy. Typically, those that file should meet the following criteria:

  • Have a low credit score.
  • Have no foreseeable way to pay off debt within the next few years.
  • Do not possess expensive property.
  • Have more than $10,000 in debt
  • Struggle to make payments.
  • Are in fear of legal action being taken against them due to debt.

Debt management plans

One form of debt relief is known as debt management. These plans allow the consumer to pay his or her unsecured debts in full but at a reduced interest rate or with fees waived. In many of these plans, the consumer makes one single payment monthly to a credit counseling agency. The agency then distributes the money among the consumer’s creditors, paying off the debts through one larger monthly payment, rather than multiple smaller ones. During this time, the consumer’s credit card accounts will be frozen for the duration of the plan.

During the payment plan, if the consumer misses any payments, this can knock him or her out of the plan, so it is key that the consumer keeps current on all payments during the duration of the plan. It is also advisable that the consumer pick an agency to work with that is accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of Americas.

Debt settlement

Unlike debt management, debt settlement does not pay the consumer’s debts in full but rather works with the creditors to pay off the debts at a reduced amount. Normally, debt settlement is seen as a last resort for individuals who are struggling to pay their bills but either do not want to file for bankruptcy or cannot qualify for bankruptcy.

In these programs, debt settlement companies will ask the consumer to stop paying his or her creditors. Instead, the consumers pay the debt settlement company, and this money is put into an escrow account. At this point, the debt settlement company will negotiate with the creditors directly on what amount the creditor will take in settling the debt. There is nothing that requires the creditor to settle the amount owed; although, most will take something, even if it is less than what is owed, in lieu of receiving nothing.

One thing to keep in mind is not paying outstanding bills puts the consumer at risk of collections, penalty fees, and possible legal action. The fact that the consumer is going through debt settlement does not prevent any of these consequences from occurring.

Debt settlement also comes with a special set of tax consequences. The consumer will likely receive a bill for taxes on the amount of debt that is forgiven. The IRS counts forgiven debt as income for tax purposes. If the amount is fairly significant, this means the consumer should expect a pretty significant effect on his or her taxable income for that year.

Be alert for scams.

With debt settlement, creditors agree to take a settlement that’s less than the amount you owe. In return for the settlement, they close the account and stop the collections process.

Like so many things in life, what seems too good to be true- usually is. There are bad debt relief programs or scams meant to take advantage of those in desperate financial situations.

Before signing up for any debt program, it helps to do your homework. Look into what is needed to qualify, what fees, if any, are charged, and how creditors are paid and when. Some of the worst offenders require high fees for participation and tell borrowers to stop paying on any debts while they work out payment plans on debts. In the meantime, the consumers end up with significant damage to their credit scores and potentially legal implications. Also, investigate what tax implications the consumer will face after.

Do-it-yourself debt relief

Many times, it is easy to work with creditors directly instead of going through a debt settlement company. Credit card companies and other types of creditors will often work with consumers directly.  Consumers are perfectly welcome to create their own form of debt relief, whether it be a combination of debt management, debt settlement, or even debt consolidation. Whatever plan is chosen, the consumer should not continue to add debt to his or her already existing debt load.

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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.