Millions of consumers have found themselves in the unpleasant situation of being knee-deep in credit card debt. Even worse, a large percentage of these indebted consumers are currently making only the minimum monthly payments and aren’t seeing progress in eliminating their debt. Continuing to only make the minimum payments can literally take the consumer decades to completely pay off their debt. This disturbing prospect has motivated many to explore credit card debt solutions for relief.
Here is a breakdown of the two most prominent credit card debt solutions currently in the marketplace: debt management plans and debt settlement programs.
Debt Solution #1: Debt Management
Debt management plans (DMP), which are offered through Consumer Credit Counseling Services, are a major player in the debt solutions industry. They’ve proven to be attractive to indebted consumers primarily because they can help reduce high interest rates. In addition, they can get the consumer debt-free in about one-third the normal time, stop late and over-limit fees, get creditors to re-age the accounts (submit them as “current” on the credit report), offer a single monthly consolidated payment, and protect the consumer’s credit score during the process. Further benefits include providing relief from collection phone calls and assisting the consumer in avoiding a possible bankruptcy.
Another benefit, and one that is intended to endure beyond the debt management plan, is the personalized financial counseling that consumers receive from the credit counseling service prior to their enrollment in the DMP. The counseling not only determines whether there is an actual need for a debt management plan in the first place, but also educates the consumer on how to budget and stay financially sound long after the DMP has been completed.
Debt Solution #2: Debt Settlement
Debt settlement programs are designed for consumers whose debt problems are even more serious than those that can be handled effectively through a DMP. The resulting credit damage from a debt settlement program is substantial, as is the harassment of collection phone calls from the creditors. The consumer’s debt situation should be desperate enough that these serious downsides are outweighed by the potential benefits of the program.
Another downside is the uncertainty that can surround a debt settlement program. The negotiation processes carried out in the program provide no absolute guarantees that the creditors will settle the debts favorably or that the consumer will not end up being sued.
Also, the required process in many situations is for the settlement company to take no action on the consumer’s behalf until a specific point in time, which may be 6 months or more after the customer has enrolled and begun paying the company. So consumers essentially pay fees for a period of time, during which they must simply trust that the company is reputable and will act on their behalf at the appropriate time with the creditors. Meanwhile, it is usually during this same period that the creditors will gear up their collections efforts and exert as much pressure as possible on the consumer to pay the money that is owed.
The unsettling nature of this business arrangement for consumers has been a subject of major concern and debate in political circles. The Federal Trade Commission (FTC) is currently working to adopt reforms that would serve to protect consumers and make them less vulnerable to unscrupulous debt companies. When they are realized, the benefits of a debt settlement program can include significantly reduced balances, lower consolidated monthly payments, payoff timeframes of 2 to 5 years, and relief from collection phone calls.
For consumers with extreme debt problems, it can be argued that the overall pros and cons of debt settlement are superior to those associated with bankruptcy. However, bankruptcy may be the only debt solution for some, due to the lack of sufficient income needed to fund the required settlement program payments.
To determine which debt solution is right for you, get in touch with a debt advisor by filling out the online form on the right.
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