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Kristy Levin is turning 30 this year. She is married with a one year-old daughter and is a stay-at-home mom. But all is not well in the Levin household. As a result of a lot of credit card debt accumulated by Kristy when she was in college, she is still struggling to pay off her cards. Because she is now out of the workforce, Kristy’s husband is finding it difficult to cope single-handedly with the household expenses as well as her minimum debt payments. Kristy is terrified that she has no other option than to file for bankruptcy, but, the consequences of doing so are still stressful to her. She worries about her child’s future and whether she can really start from scratch again to get her life back on track.
Like many others in similar situations, Kristy finds it is easy to be complacent about increasing debt until it is too late. Soon, even stretching your monthly income to its limit barely covers your expenses or supports your existing standard of living. The solution is to pay attention to warning signs before a crisis develops. These are the steps that can be taken to remedy the situation. Read on to find out what the signs of financial distress are and what options you have to get your financial life back on track.
To say that credit and debt issues are a large problem in today’s society would be an understatement. With the rising cost of everything from houses, cars, and education, to food, utilities and gas, it is no wonder that things spiral out of control for many individuals and families. There can come a time when it becomes impossible to maintain your lifestyle and you are faced with a limited number of options. These options range from severely restricting your expenses and changing your spending habits, to opting for a debt settlement or debt management plan, or as a last resort, to declaring bankruptcy. Before you are forced to make such a big decision, it is important to pay attention to the warning signs that give you an indication that all is not well and that you might be heading towards a financial crisis. These warning signs include:
If one or all of the situations above apply to you, it might be time to get professional help as soon as possible. There are other options besides bankruptcy and a credit counselor would be the best person to guide you to the correct solution for your individual situation.
These warning signs should be regarded as a means to prevent a deeper slide into financial despair. The best person to spot these signs of financial distress is YOU, so don’t ignore your problems and DO get professional help before it’s too late.
If you have identified with one or more of the above danger signs, it is time to make a change starting now. Financial stability is not an easy goal to achieve. It takes time, effort and determination, but it can be done. Here are some suggestions to help you get back on track:
Ultimately all of us hope for financial stability. Budgeting, monitoring, planning, saving – they all help you realize your end goal, to be financially independent and stable. The road to getting back on track may be fraught with hardships and sacrifices, but it also represents the possibility of security, freedom and confidence.
If you believe that you are being honest with yourself and are aware of all aspects of your financial situation (the good and the bad), self-administration could be a solution to your money management woes. It may take months or even years of commitment, sacrifice, determination, and hard work, but it is possible. Just remember, like everything else in life, there is no quick fix with regards to money matters. You could start with the following:
Self-administration may be an effective solution to your financial problems if you are able to seriously devote your attention to the process. Without commitment and perseverance, it is too easy to slip back into accumulating more debt and creating additional crises. This is why in financial matters and money management, it often pays to seek professional help in the form of credit counseling, debt management, or debt settlement.
If you need to manage or reduce your existing debts, you could look into a Debt Management Plan (DMP) offered through a Credit Counseling Agency. With a DMP, you make consistent monthly payments and tackle debt such as utility and medical bills in collection status, credit card bills and other unsecured debts. A good Debt Management Program will normally include credit counseling, debt consolidation and/or debt settlement.
It all begins with a counseling session with a certified credit counselor who will take into account all your existing bills and debts and take into consideration your financial track record as well as your monthly income. You will also be educated in how to save money, to budget effectively and prevent future debt. You will then be offered the option of either debt management or debt settlement.
A DMP may reduce your monthly payments by consolidating unsecured debts into a single manageable payment that is then dispersed to your creditors. Signing up for a DMP may also result in a waiver of late and over-limit fees and a lower rate of interest (but this could vary from case to case). In this way, you can pay off your debt in a less stressful and more structured manner, and often in a shorter time frame than you would be able to achieve on your own.
Before you opt for a DMP, always check that the credit counseling agency is accredited, certified and nonprofit. Examine all the options available to you and do not get tricked by “additional” fees such as admission, application or consultation fees.
The obvious advantage of a DMP is the opportunity to get lower monthly payments and interest rates as well as a possible waiver of fees. These features can add up to considerable savings over time. For your future protection, however, you still need to pay close attention. Make sure your creditors have agreed to any changes and get everything in writing to avoid future claims. There is also no guarantee that your creditors will agree to lower your payments or waive any charges and fees.
If you do not feel confident about handling your own finances effectively, it could be a huge relief to hand things over to your credit counselor. A professional is also more likely to successfully negotiate with and convince your creditors to lower your rates and agree to any change in the repayment plan. Conversely, if you are hesitant about handing over control of your finances to a third party, this option may not be best suited for you.
A DMP, when put into practice early on and followed closely, can be an effective solution to handling all your unsecured debts and prevent bankruptcy. This will free up more money and allow you to concentrate on your secured debts such as mortgages and student loans.
Debt management is definitely not for everyone. Some might prefer to handle their own finances and some might not even be eligible for such a plan but for many, a DMP is a well-planned, structured way to get out of debt.
Debt settlement is a process where a settlement negotiator will work out an agreement for you with your creditors in order to help you pay any delinquent payments or unpaid bills. These debt settlement programs can help your significantly lessen your terms of payment. Depending on the persuasion skills of your settlement negotiator or yourself, you might be able to benefit from lower balances and a reduction in harassing calls from your creditors (once you are enrolled in a debt settlement program). Debt settlement may also be appropriate if your original creditor has charged-off your debts and sold this debt to a collection agency. And while there is no guarantee that the collector will agree to settle, larger collection agencies are normally more open to negotiation.
Debt settlement is best suited for credit card debts, though there are also programs available for other types of debt. Debt settlement programs prove the most successful for people who have a fairly good credit history and who have managed to make payments consistently in the past. If you have too many default payments on your credit history or have a low credit score, it may be more difficult for you to get accepted in to a debt settlement program.
The outcome of a debt settlement program differs from case to case. Some have reduced their debt to as much as 75 percent while others might manage only 30 percent, so don’t expect miracles. You will also need to be patient as paying off your creditors can take anywhere from two to five years.
There are several benefits to joining a debt settlement program. It will allow you to pay less than the full amount due and still satisfy your debt (be sure to get all agreements and transactions in writing though). Your credit report will no longer indicate a delinquent payment and collection calls and legal action may be stopped as a result. But in many cases, your credit report might show a settled debt rather than one paid in full which can have a significant impact on your credit report. This forgiven debt will then be reported to the IRS as taxable income. In the event that you have not recorded the details of your agreement/negotiation in writing, it is possible for the collection agency to still sell your debt to another agency and show your status as delinquent. Debt settlement agencies can often charge substantial fees. These could be up front or taken from your final settlement to your creditors, ultimately leaving you with less savings than you anticipated.
Declaring bankruptcy is never an easy choice to make. It can have long term consequences on your credit, your self-image and even your relationships. On the other hand, it may reduce your stress and anxiety in relation to your mounting debts and prevent you from losing your assets. Often regarded as a last resort, this is one debt management process that cannot be taken lightly.
Declaring bankruptcy should only be done after weighing all the pros and cons, under professional guidance and only when it is the last choice left.
By definition, bankruptcy is declared when a person is not able to pay off his or her debts (and has proven that it is impossible to do so). All liabilities are settled legally in full or in part. This allows the creditors to receive a fair share of what is owed to them as well as give the debtor a fresh start to his/her financial obligations.
Some reasons for considering bankruptcy:
There can be a stigma attached to the concept of declaring bankruptcy but it can also have a positive effect on your financial burden, if chosen. These may include:
There are many legalities involved and things to take into consideration when declaring bankruptcy. This is not a decision to be made without the aid of a competent lawyer. And while care should be taken, it should also not be disregarded as an option because of fear or embarrassment.
The disadvantages of declaring bankruptcy need to be studied and thought through before making any final decision. These include:
If you are sinking in debt and feel there is no way out, bankruptcy can help you achieve financial stability again, but there are a number of sacrifices you have to be willing to make. The impact of bankruptcy must be clearly understood and a choice has to be made.
As you can see, there are various alternatives available to dealing with debt. With choices including budgeting, debt settlement, debt management plans, credit counseling, and finally bankruptcy, there are pros and cons associated with each. It is imperative that you fully understand your individual financial situation and commit yourself to changing your habits regarding spending and saving. Faced with the possibility of foreclosure, repossession, and losing everything that you value, it is important to make that first step on the path to financial recovery as soon as possible. With a lot of determination, sacrifice, and commitment, you can experience lasting changes.
The pros and cons of options such as debt settlement, debt management, self-administration and bankruptcy as solutions to your money management debt problems.
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Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
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