Are Debt Counseling and Loan Consolidation Services Worth the Trouble?
With the Sacramento debt problems rising, credit card debt has become even more unmanageable. My clients usually ask me if consolidating their credit cards with a debt servicing company is an option they should consider. While debt relief companies certainly make a strong pitch that they can help you get out of debt, I am not convinced that these debt settlement plans truly provide individuals with a fresh start.
Options for Dealing with Credit Card Debt
In a recent New York Times article, Weighing the Options With Credit Card Debt, the author reviews common options available for those with credit card problems. The article highlights the need to carefully consider your budget and the financial advantages of a settlement plan when deciding on a solution for your debt. For example, if you have hardly any disposable income, you may not be able to justify paying a large upfront fee for a company to manage your debt. In addition, there may be monthly fees charged by these companies. In the end, you may end up back where you started, unable to make your monthly payments, even though the payments are in a new form, such as a longer payment term, lower rate, or single consolidated payment.
Credit Card Debt Settlement; When Does it Make Sense?
In my opinion, there are a few challenges for Sacramento residents who want to settle or pay off their credit card debt by using a consolidation company. First, the challenge is to find a proven company that is affordable and actually gets results for its clients. Second, the applicant should have enough money to hire the debt relief agency. Third, the applicant should be able to qualify for the money payment plan to the group of creditors. Fourth, the applicant's income should be low enough to justify a creditor making some concession, like lowering the interest rate on the card debt. Getting a creditor to reduce the principle balance on the credit card account is rare, and it usually takes a large upfront payoff to the creditor. The final hurdle is that the total amount of debt should be low enough so that financing it into a payment plan is reasonable and doesn't stress out the applicants finances for the rest of their life.
As you can see, there are many reasons to disqualify someone from a credit card loan consolidation plan. In limited cases, it might make sense where the individual meets the above criteria. Personally, I have found it to be quite rare that one of my clients will achieve a better financial result in a debt settlement plan. As a bankruptcy attorney in Sacramento, my goal is to navigate through the various options outside of bankruptcy. Admittedly, its not easy to keep up with all of the newest debt elimination advertisements in Northern California. While bankruptcy is not right for all candidates, I do find in my practice that most of my clients realize a more significant debt discharge by filing bankruptcy.
Comparing Bankruptcy to Credit Consolidation Plans
An eligible and qualified Chapter 7 debtor in Sacramento can usually discharge all of their unsecured debt. Credit card debt is usually unsecured. If a discharge is issued in the case, creditors are permanently barred from contacting the debtor to try and collect the old debt. The debtor has a fresh start. The Chapter 7 process usually takes about four months to complete.
Individuals with higher than average income who qualify for Chapter 13 usually pay only what they can afford to pay on unsecured debts. The payment plan in most cases is between three to five years and the interest rate is usually zero. Again, once the payments are completed, the remaining debt is discharged, and the creditors can no longer attempt to collect the debt from you.
Credit card consolidation on the other hand may require the applicant to pay interest on the debt over a longer period of years and to completely eliminate all of the debt the applicant usually must make a large payout offer. The viability of the settlement agreement will often depend on the quality of the company handling the debt services.
