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Debt Relief Options and income based qualifications

January 14th 2013

It is both unfortunate and fortunate that the options available to deal with problem debt are limited.

  • Unfortunate that your options are truly limited.
  • Fortunate that with fewer options you have the ability to quickly assess which one will best suit you and help you deal with the debts.

The main options for debt relief consist of the following; Debt Management Plan (DMP), Debt Settlement and Bankruptcy. There are pros and cons to consider with each. Your personal situation and goals may cause your "best" option to be someone else’s "worst" option.
In order to really grasp the best and worst of each option you should speak to reputable professionals who offer them. There are generalities that can be assumed about each option, but evaluating the specifics as they would apply to your unique set of circumstances better learned from someone who:

  • An attorney who represents consumers in your local bankruptcy courts
  • A credit counselor who can help you learn if you qualify for a Debt Management Plan
  • A debt negotiation company that works with your creditors in order to settle debts.

One thing you should focus on with each option is the math. I know - sounds boring, but stop and think a moment about all of the emotion you have experienced leading up to the realization you can no longer stay afloat. Could you “use some boring” right about now?

Sticking to "dollars and sense" will typically lead to the elimination of at least one, if not two of the three options allowing you to focus on how the option(s) remaining will help you get out of debt.

Sizing up your monthly budget and weighing that beside your options to manage debt is not complicated. Qualify for a debt management plan or a chapter 7 bankruptcy is straight forward. Debt settlement math is different so I will keep that for last.

Working with a Credit Counselor in a Debt Management Plan:

When you contact a credit counseling organization to find out more about how a debt management plan could work for you, you will be asked many financial questions. What your normal monthly bills and income are as well as what you are paying toward credit cards. This information will be put into their system and ultimately calculate a proposal for paying off your credit card debts over an average of 4 to 5 years. There is more to a consultation with a credit counselor but start with the math.

Because the financial benefit to a DMP rests mostly on reduced interest rates and lower monthly payment concessions they have prearranged with most credit card issuers, the monthly payment proposal is currently going to hinge on your ability to pay anywhere from 1.8% to 2.2% of your combined credit card balances monthly for the life of your plan. The figures and formulas for a DMP focus on monthly income to determine your eligibility. If you cannot fit the product, the proposal will not be submitted. If you can fit the product the proposal will go into your creditors for acceptance. The simplicity for qualifying or being turned down for a DMP is one of its biggest strengths.

You need to know that the math in a DMP is fixed and inflexible. This is one of the biggest drawbacks. If your plan is accepted and you begin payments, that’s your program. With little exception, you must make your monthly plan payment on time all the time. If you miss a scheduled payment your plan is typically cancelled.

Chapter 7 Bankruptcy:

There were changes to bankruptcy laws in 2005 that were heavily lobbied for by banking interests. The changes were supposed to make it harder for people to discharge debts in a chapter 7 and force more people into a chapter 13 repayment plan. It did not work very well. Since the changes were enacted roughly 70% of filers still file chapter 7 and due to the downturn in our nation’s economy, bankruptcy filings have remained elevated for several year.

One of the changes was to create a state specific income hurdle that has to be cleared by individual bankruptcy filers in order to qualify for chapter 7 where most unsecured debts, like credit cards, are wiped away and where you can get a financial fresh start. The figures and formula for income means testing is different for each state and for each person based on exemptions you may qualify for, how many dependents you have etc…

The income test used when you actually file is a bit more quirky than simply using your prior year’s tax return. If you earn more than what is listed as allowed in your state and for your number of dependents, do not let a quick glance at the figures deter you from contacting a local bankruptcy attorney. During the attorney consult you may learn of exemptions you qualify for or how your income is determined on the past 6 months and then averaged for a year which could help you clear the income test hurdle.

You should talk with an attorney about chapter 7 bankruptcy.

Chapter 13 bankruptcy:

Chapter 13 is available if you cannot qualify for a 7. You will be repaying your unsecured credit card debts based on what the trustee determines you have available using a financial formula. The math the bankruptcy trustee will use is unique to where you live and will fluctuate based on income and expenses. The plan will be for either 3 or 5 years. Most chapter 13 bankruptcies last 5 years.

If the math shows you will pay 100% or 30% of the balances over the term of the plan, that’s what you do. The process is inflexible and fixed. If you do not make a scheduled payment to the trustee you will in all likelihood lose the benefits and protection of the bankruptcy court. If you do miss a payment due to a life event and you qualify, you can convert to a chapter 7 bankruptcy.

Prior to committing yourself to a chapter 13 plan, you should compare whether a debt settlement approach to your unsecured debts would be a workable alternative. Debt settlement may help you avoid the strict and unforgiving aspects of the 13.

Debt Settlement:

Other than filing chapter 7, using balance negotiations with credit card accounts in order to reduce your debts will provide the right person the best and quickest path to financial recovery. The key to the debt settlement option is no different than the others. It’s the math. The formula and figures will be a bit more involved the more accounts you have.

The basic number crunching involves the balance on each credit card account, what the trend is with each of your creditors for settling before the account is charged off or after it is placed with an outside collector or sold to a debt purchaser. A legitimate company providing a debt settlement service will be able to calculate and approximate the amount of money you will need to come up with in order to settle your accounts. Speaking with a professional debt negotiation company will help you understand right up front what amount of money you will need to complete the settlements from start to finish.

Conclusion:

Going through the process of elimination of which debt relief option will work with your income and budget is not complicated when you are motivated to get your debt under control. Research each of the above options by speaking with professionals and then consider and apply the right solution based on what you learn.

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