Debt Relief: Two Solutions that Work


Are the bills out of control?

We’ve all heard the ads—now we’re hearing the warnings. Debt relief has become a growth industry laced with fraud and abuse. When you face a pile of unpaid bills, the last thing you need is to worry about is finding help you can trust. Where can you turn to get back on track? As we see it, there are only two safe and effective solutions for severe debt relief: 1) apply for help under a non-profit debt management program, or 2) discharge your debt through bankruptcy.


Reason for Caution


Whenever you hear an ad that promises to fix your credit, you can be sure it is from someone who hopes to profit from your misfortune. While it’s true that debt counselors need to earn a living, the best ones won’t demand fees from you, and they won’t keep any of the money you give them to pay off your creditors.


In recent years, there has been an explosion of private, for-profit companies offering to settle your debts for a fraction of what you owe. Unfortunately, many of these companies made faulty claims or were outright rip-off artists. According to the Federal Trade Commission:


“The Commission has prosecuted more than a dozen companies that allegedly offered debt relief but misrepresented the cost or nature of the relief…”


If you are one of the people with first hand experience of a shady debt relief company, you may have heard promises to cut your debt by 50-70%, and were asked to pay an up front fee.  Due to recent changes in the law, a debt relief company can no longer charge you a fee until:


  • It is able to reduce at least one of your loans, or change its terms.
  • There is a new, signed agreement between you and the lender.
  • You have made at least one payment to the lender under the new terms.


For a good article describing the recent problems with debt settlement companies and the new rules they must follow, click here.  For a short piece from Cambridge Credit explaining debt settlement problems play the video below.



Now for some good news:  You don’t need to pay for help in settling your debts. You can get excellent help free, or you can work with your lenders yourself.


First Steps


First, think about your state of mind. When you can’t pay your bills it is normal to feel a bit overwhelmed. However, if you feel paralyzed and unable to act, or if you suspect you aren’t thinking straight, it is time to get help. Find a free, nonprofit debt counselor in your town or online, as explained below.


If you think you can handle it yourself, it makes sense to contact your lender(s) to see what they can do. They might let you skip a payment, or pay less this month. It may help to explain the reason you’re having trouble—for example, maybe you had expensive medical treatments. Understand that the bank will want some assurance that you will have enough income to continue paying. Also, they are not likely to offer a permanent low payment plan unless you are already running late or missing several payments. Just make sure if you reach a deal that:


  • You’re clear about the state of your finances and what you can afford.
  • You understand that a new payment plan may last many years.
  • You realize that your credit score will take a hit.


Any time you settle a debt for less than what you owe, it is noted in your credit record and it affects your credit score. Still, that is far better than not paying at all, or letting it become a long, ongoing delinquency. Those are serious red flags.


You’ll want to be sure you can stick to any plan you negotiate, or you’ll end up in even worse straits. Before you talk to your bank it pays to do your homework. Work up a budget to get an idea of how much you can afford to pay on your debts.  Try to get a good handle on your basic living costs—for example the cost of housing, utilities and food.  The more prepared you are going in, the better chance you’ll have. If you are unable to get help from your lenders, it is time to get assistance.


Two Kinds of Debt Assistance that Work


As we noted above, when your situation becomes dire enough there are really only two solutions that can fix the problem: (1) get credit counseling and start a debt management program with a nonprofit agency, or (2) discharge your debts through bankruptcy. Which solution you choose depends on your circumstances. However, both have certain advantages and disadvantages you should be aware of.



Nonprofit Counseling and Debt Management


A certified nonprofit debt counseling agency provides excellent credit counseling plus programs to restructure debt. It does not try to get rich from either the borrower or the lender. For you the borrower, a nonprofit is likely to negotiate the best deals on your behalf, and give you the guidance you need. For the lender, it assures that the borrower has been carefully evaluated and counseled, can afford a payment plan, and will be monitored and guided.


How can you find an agency that is nonprofit and legitimately concerned with your best interests? One way is to find one in your area or online that has been certified by the National Foundation for Credit Counseling Inc. (NFCC), at It is the oldest and largest network of nonprofit agencies devoted to helping people who have credit problems. It represents over 100 nonprofits with 850 offices around the U.S.


Many of these agencies call themselves the “Consumer Credit Counseling Service”, however some go by other names. What matters is that all have the NFCC member seal, showing they have met high standards for quality. In fact, the quality standards demanded by the NFCC are more rigid than those of the for-profit services. To see how tough the standards are, click here.


Be aware that even some NFCC member agencies charge modest fees to borrowers, but most do not. If possible, it is best to stick with an agency that doesn’t. Some agencies are also less busy and more responsive than others, so it pays to talk with a few before choosing one that you like. To locate a certified NFCC member agency in your town or online, click here.


How Nonprofit Debt Management Works


When you can no longer pay all your bills but still have enough income, your credit counselor may recommend debt management. In this plan, the agency negotiates with your creditors for you, in order to lower your payments and eliminate late fees. You pay the agency a monthly deposit, and it pays your bills for you. Under this plan, it takes about three to five years to pay off your debts. Your credit is saved, and you are “back in business”.


How is the nonprofit agency paid? One main source of funds is seeking fees from your lenders in return for collecting money from you. However, every payment you make to the agency is passed along in full to your creditors, and the agency will still work with a creditor even if it refuses to pay any fee. Agencies may also be funded by grants from foundations and private sources. As mentioned, some also charge small fees to the client (you), depending on what is allowed by state law.


Tip: Even when you are participating in a debt management plan, some lenders may still make unnecessary collection calls. If you are being harassed this way, ask your counselor to request the lender to stop, pointing out that you are following the plan as agreed.


The “B” Word:  Quick, True Relief at a Cost


Peking duck.

“Oh, poor Javabird! Are your debts getting you down?”

Bankruptcy is a emotion laden word for a process that doesn’t have to be as bad as it sounds. In fact, for many people it provides life-changing relief. As soon as the initial papers are filed, normally within days, all of the calls, harassment, and pain stops. By law, creditors are no longer allowed to contact you directly.


However, bankruptcy is not the first step to consider by any means.  It should be the last. Bankruptcy still carries a stigma with some people and can be humiliating.  Though it should be considered a clean break and a new start, it’s easy to see yourself as a failure if you go through the process.


Bankruptcy is a major step.  For most people, it means finding and paying for an attorney.  It also requires spending a day in court, and perhaps losing some or even most of your assets.  Plus, depending on whether you file “Chapter 7” or “Chapter 13” bankruptcy, you may still be in debt.  Full Chapter 7 bankruptcy leads to complete debt elimination and a true fresh start. Chapter 13 bankruptcy is different.  Under Chapter 13 you reorganize your debts.  This could mean you still have certain debts and will need to adhere to a new court approved payment schedule.  The more assets or income you have, the more likely you will need to file under Chapter 13.  You’ll want to consult with your attorney to determine which option is available or better for you.


When you file for bankruptcy you may be allowed to keep some equity in your home and your car, some retirement accounts, as well as personal possessions of small monetary value, such as an aging computer. You should also be prepared to surrender items you own that have significant value and are easy to sell. Creditors will not necessarily want items if they are cumbersome to hold or sell, but there is no way to predict it one way or another.


One of the hardest parts of bankruptcy is that it will stay on your credit record for seven to ten years (depending on whether it’s Chapter 7 or Chapter 13), and traces of it may last for ten years or more. Even so, lenders recognize that bankruptcy is a clean break, and many people begin rebuilding their credit within months after their bankruptcy is discharged.  For example, you could start over with a new “secured credit card” right away that links to a savings account the size of your credit limit.  If you can’t do that at a bank, try a credit union.


Changes in the law a few years ago make the bankruptcy process more cumbersome and costly for borrowers than it used to be. Bankruptcy can now require counseling and partial repayment. For people with a lot of assets, this can make it less suitable than for those of more modest means.  In either case, it still may be worth proceeding if you are facing severe debt with no hope to get clear of it.


Finding a Good Attorney


Although you can find cheap bankruptcy services online and from paralegals (non-attorneys), the complexity and the need for thoroughness and follow-through make it well worth using an experienced, qualified attorney that handles many cases.  Here are some things you should look for as you seek out an attorney:


Good traits for a bankruptcy attorney.


A good bankruptcy attorney is likely to advertise in local media, but some careless attorneys advertise as well. Perhaps a friend has gone through the process, and can recommend an attorney to you. Or it may help you to visit the bankruptcy court and watch one or more attorneys in action. You might find a good attorney this way, plus familiarizing yourself with the process will help ease your concerns. Bankruptcy court is a special civil court that often seems a bit informal. A bankruptcy motion is not a criminal proceeding, but the courtroom is still a serious place that requires appropriate dress and manners. Your state bar or the state itself may have a website where you can check for complaints about particular attorneys.


Paying Less Than You Owe


The responsible person is sure to feel some guilt or humiliation about settling debts for less than the amount owed.  This is especially true in bankruptcy.


Dealing with the emotions that crop up around money and debt can be difficult.  Sometimes it’s best to remember that a life without challenge is a rarity and everyone faces adversity at some point.  If you’re in debt, chances are excellent that you didn’t take out your loan with the expectation you couldn’t pay it back.  No matter how you ended up in trouble, it’s important to realize a loan is a business decision made by two parties—a borrower and a lender. This means that the lender shares at least some blame for underestimating your ability to pay. It was his job to evaluate all risks, and to evaluate how creditworthy you were before even lending the money. He was supposed to be the credit expert, not you.


At the same time, blaming others for the problems we face is often counterproductive.  When you face a budget out of control, it’s probably long past time to re-examine your priorities.  A bit of self-reflection can often prevent a bad situation from getting worse, or it can set the course for a brighter future.  If you haven’t read it yet, you make want to see our page on Zero-Based Living.


Which Route to Take?


How do you decide whether to seek nonprofit counseling or declare bankruptcy? The best source of advice has no financial stake in the issue. Therefore, don’t ask a bankruptcy attorney if you should declare bankruptcy. Don’t ask a paid debt settlement agency if you need debt settlement. Instead, speak with a nonprofit credit counseling agency to evaluate your situation and help you decide. Or speak with an observer who has nothing at stake, such as a friend or pastor.  They may offer the best insight of all.


The clouds are breaking up.

There’s a brighter day ahead.

If you have no income and no prospects, if collection agencies are hounding you, if you are being sued by creditors, or if your wages are being garnished, it may be time to file bankruptcy. However, if things are not that dire and you earn some income, nonprofit debt management may offer the best route for improving your situation. See an agency and find out. Bankruptcy should be a last resort, but if you need it and understand the consequences, don’t be afraid to do it. A fresh start in life can be a wonderful thing.


For more information on the subject of credit, you may want to read:

Negotiate and Settle Your Debts: A Debt Management Strategy – By Mandy Akridge

Best Credit: How To Win The Credit Game – 2nd Edition – By Dana Neal

The Complete Idiot’s Guide To Getting Out Of Debt – By Ken Clark


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