Has your debt-ridden book-keeping gotten too crazy to handle? Lost a job, got a divorce, had an unexpected emergency that snowballed into something that got out of control? It happens, and maneuvering a sea of debt solutions in times of crisis or financial stress can often add to the feeling of stress and uncertainty. There is much misleading information on the internet, so let’s try to clear some of it up to help your book-keeping get back on track, and get you back to a position of smooth sailing, once again.
There are four common solutions to this predicament, including bankruptcy, a debt management plan through a non-profit organization, a debt management plan through a for-profit organization, or the self-help approach debt management plan. Let’s discuss each of these options.
United States Courts online site (http://www.uscourts.gov) defines bankruptcy as “A legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code).” There are two main ways to file for bankruptcy, including Chapter 7 and Chapter 13, depending on your current status. Note that both options can be costly and will reflect on your credit report for 7 to 10 years depending on the type filed. Therefore, getting your book-keeping and life back on track can be a bit challenging, so let’s see what the other options have to offer.
Now, we come to debt management plans (DMP). What exactly are these? According to Wikipedia, (https://en.wikipedia.org), “A debt management plan (DMP) is a formal agreement between a debtor and a creditor that addresses the terms of an outstanding debt…This commonly refers to a personal finance process of individuals addressing high consumer debt. Debt management plans help reduce outstanding, unsecured debts over time to help the debtor regain control of finances. The process can secure a lower overall interest rate, longer repayment terms, or an overall reduction in the debt itself.” Generally speaking, after reviewing your book-keeping and credit reports, you’ll receive financial advice, establish an agreement, then you would pay the counseling agency, who in turn, would pay the creditors. Three to five years of payments in this type of plan before complete payoff is relatively common. DMPs are often offered as an alternative to bankruptcy. You may’ve heard that they don’t affect your credit score. While this is true regarding the actual enrollment in the program, there can be some impact on the credit score due to the changing dynamics of the credit profile and closing of accounts, for example. If all payments are made on time and the full principal balance is paid, the impact on credit score can be less severe than bankruptcy. However, the requirements can be strict to be truly effective and to keep the plan intact. For example, missed payment(s) can result in cancelation of the plan. There often is a notation made on the credit report that reflects a credit counseling agency has been employed and payments can remain on your credit report for six years from payoff, but will be updated to a “satisfied” or “settled” status, indicating that you have paid in full.
There are debt management plans available through non-profit and for-profit channels. You may be interested to read what the Federal Trade Commission advises as you consider different organizations https://www.consumer.ftc.gov/articles/pdf-0045-debt-management-plans.pdf and see if one of these is the right option for you.
Lastly, there’s the self-help approach debt management plan. In this DIY approach, one would generally get their records in order, create a budget to see what money can be applied toward the debt, call the creditors to negotiate and make a repayment plan and then try to improve spending practices going forward. While this can be less strict than the plans available through organizations and counselors that perform these functions, it can also require discipline and good book-keeping which may’ve contributed to the problem in the first place. The accountability falls entirely on you.
So, whether you opt for bankruptcy, a debt management plan through a non-profit or a for-profit organization, or the self-help approach, you have much to consider regarding each of these strategies and how they align with your capabilities and goals for the next several years, in order to make an informed decision.
Written by Tax Professionals