Debt Relief Introduction
The term “debt relief” materializes several different ways but has one specific meaning--relieving debt as the partial or total forgiveness of debt. This can be done through re-organizing and re-prioritizing finances or by working with a debt relief company to reconcile the balance to a manageable amount.
Debt relief is needed in order to rebuild credit, maintain or increase personal or commercial savings and to reduce the stress and burden placed upon individuals who carry unresolved debt.
Because debt relief can be approached several ways, consumers should examine their situation and compare which remediation will produce the best outcome.
How to Reduce Debt On Your Own
Before it becomes completely unmanageable, consumers can attempt to wrangle debt under control. Typically people may not recognize when debt reaches uncontrollable levels however, signs are evident. Signs that you may be falling into debt include:
- Only being able to make the minimum payments on credit cards
- Living paycheck to paycheck - with no money going toward investments or savings
- Using credit cards more often than cash
- If credit cards are reaching their limits
- If you have started paying your bills late
Recognizing the early signs of debt can help you stay away from falling any deeper. However, once you know that you are in trouble, what can you do?
The first step is to consider your income as compared to basic expenses--rent, mortgage, utilities, gas etc. For the most accurate picture, use debt calculators to calculate your true assets as compared to expenses. Finding receipts or invoices that reflect what you are paying every month will help you get an accurate picture of your financial health.
Next, prioritize expenses to determine if paying down debt is something you can accomplish without assistance. Allocate enough money to cover the major monthly expenses such as:
- Taxes and insurance
- Auto loan
What ever cash his left over should be dedicated toward paying off credit card debt, unpaid medical expenses and any other line of credit.
Types of Debt Relief Intervention
If you cannot manage debt by simply re-prioritizing your cash flow, professional intervention may be necessary. There are several types of professional intervention that may be helpful:
Credit counseling is the educational approach to debt relief. Consumers meet with a credit counselor to learn how to avoid incurring debt and possibly how to create a debt management plan. The credit counselor may negotiate with creditors to establish a debt management plan (DMP) which may help in debt re-payment. DMPs often offer a reduced interest rate, lower fees to the client.
Debt consolidation is when the debtor takes out one loan in order to pay off other debts. The loan is often offered at a lower fixed interest rate, with the attraction of being able to make only one payment on a lower rate loan.
Debt settlement is when a credit counselor mediates between the creditor and the debtor to determine a reduced balance considered to be payment in full. This method may also be known as debt arbitration, debt negotiation or credit settlement.
Bankruptcy is when the debtor cannot repay the debts owed to creditors and must make the declaration of bankruptcy. Six types of bankruptcy fall under the Bankruptcy Code, situated under Title 11 of the United States Code, which includes
- Chapter 7: basic liquidation--the simplest and quickest form
- Chapter 9: municipal bankruptcy to resolve municipal debts
- Chapter 11: typically used for businesses, the reorganization of funds which allows for the company to continue functioning
- Chapter 12: rehabilitation for farmers and fishermen
- Chapter 13: allows for those with regular income to repay all or part of the debt
- Chapter 15: for international cases to help foreign debtors
- Chapter 7 and Chapter 13 are the most common forms of bankruptcy.
Federal Rules and Regulations Governing Debt Relief
The U.S. government has enacted several regulations to maintain honest debt relief practices.
Debt relief companies cannot remove negative information from your credit report, even if they say they will. You are entitled to a free credit report through The Fair Credit Reporting Act if a company is taking adverse action against you. Also, credit report disputes should be free of charge--a debt relief company cannot charge you for that service.
Additionally, never sign up with a debt relief company who wants to enroll you for services by phone. The FTC’s Telemarketing Sales Rule prohibits companies from charging you a fee by phone before they settle your debt.
Debt settlement companies must disclose certain information about their program, which includes prices and terms, results (how long until you can expect to see results), offers (how much money the company will save you in debt) and the consequences of ceasing to make payments to creditors.
Also, under US tax law, forgiven debt should be treated as income because it reduces liability, which increases the taxpayer’s net worth.
However, under the context of the Mortgage Forgiveness Debt Relief Act of 2007, forgiven debt on a primary residence should not be treated as income for debts forgiven within a three-year period (from 2007 through 2009). The Emergency Economic Stabilization Act of 2008 extended the three-year period to six until 2012.