If you’re struggling with credit card debt, knowing where to turn for help can be confusing. The key to success is making an informed decision.
GreenPath recently developed an infographic to help consumers understand positives and negatives of three of the most popular debt solutions: debt settlement, credit counseling / debt management, and bankruptcy.
“There are so many commercials, blogs, ads and news stories promoting services to eliminate credit card debt,” said Jane McNamara, GreenPath president & CEO. “It can be overwhelming and hard to understand which option is best for you.”
People often choose options based on advertisements or advice from family or friends. For example, you may have heard good things about credit counseling, but you have friends that filed for bankruptcy. And those debt relief commercials sound so tempting.
There is no perfect solution to get out of debt — each option has pros and cons. “It’s easy to get into debt, but much harder to get out,” said McNamara. “There are no silver bullets.”
The GreenPath infographic highlights three paths:
Debt settlement – Attorneys or debt settlement companies may be able to settle debts for less than the full balance. This may be a viable option, if you have a lot of debt that has already been written off by your creditors as uncollectible. It also could be worth considering if you have access to a lump sum to make a large settlement payment. However, if your debt is current or less than 180 days delinquent, withholding debt payments to save for a settlement can seriously damage your credit and can potentially result in legal action. Fees are typically based on the amount settled, and consumers are usually required to pay taxes on the amount forgiven.
Credit counseling / debt management – Counseling is typically offered by a non-profit organization free of charge. Consumers usually receive a budget and action plan, and the counselor may recommend a debt management program. A debt management program is a 3-5 year repayment program that pays debts in full, often with significantly lower interest and creditor fees. Not everyone qualifies, and there is a monthly cost for the program that can range up to $75. Success rates vary by counseling organization. Credit typically improves as debts are paid on time each month.
Bankruptcy – There are two forms for individuals. Chapter 7 bankruptcy wipes away unsecured debts and prevents creditors from suing you. Many people don’t qualify for Chapter 7, and it seriously damages your credit. USA Today quoted the average Chapter 7 cost at $1,500. Some opt to file for Chapter 13 bankruptcy, which is a 3-5 year repayment program that also prevents creditors from taking legal action. The cost is about double the price of Chapter 7, but payments can be spread out over the life of the repayment plan. Over time, credit damage may be mitigated as debts are paid on time each month. Unfortunately, most Chapter 13 repayment programs fail before any debts are actually discharged.
There are no easy answers to debt problems, so it’s important that you research your options carefully. You can view and download the infographic at www.greenpath.org/infographics.