The Debt Management Options

For consumers straddled with debt and seeking an alternative to bankruptcy, the debt management industry offers two programs. In the first approach, consumers are assisted by a Consumer Credit Counseling Service (CCCS) – generally, non-profit organizations that receive funding from the credit card industry and from monthly maintenance fees charged to consumers. Under a CCCS program, the debtor repays the entire principal balance owed and the creditor agrees to accept a lower interest rate and suspend the assessment of late fee penalties. Consumers may also contract the services of debt settlement companies – privately owned businesses that derive profit from fees charged to consumers. The goal of a Debt Settlement Program (DSP) is to completely eliminate debt by negotiating a reduced lump-sum payment from the consumer.

Consumer Credit Counseling Services

The concept of consumer credit counseling services that promote financial literacy and help consumers originated with the creation of the National Foundation for Credit Counseling (NFCC) in 1951. Although funded by credit grantors, the foundation did not participate in the collection of debts. Local credit counseling offices emerged in the 1960s, often acting as franchises for national chains. In the US today, there are well over 1,000 active credit counseling organizations. Under most CCCS programs, counselors work with debtors to close current credit accounts and consolidate the monthly payments due into one manageable monthly payment. In return, the creditors agree to lower, or even eliminate, the interest rate. As a result, more of the payment is applied to the principal balance and total debt is paid off sooner, even though the new monthly payment will usually be reduced by about 10-20%. If consumers follow the typical CCCS plan, their outstanding debts will be paid off in 3-6 years, rather than the 20+ years required by the original, high-interest, credit terms.

If a credit account has not been charged off by the lender, a credit counseling program may be able to “re-age” or “cure” the account to bring delinquencies current. To qualify, consumers must make several scheduled payments to demonstrate their commitment to the program. Curing an account will not erase the record of delinquent payments from the credit report. As with all derogatory credit information, only time will lower the effect of negative marks on a credit score. This process merely signals a fresh start for the consumer, and an opportunity to begin re-building a positive credit history.

Debt Settlement Services

The concept of debt settlement is not new. A “bird in the hand,” has always been worth “two in the bush” to lenders. The settlement process recognizes the time and iva 收費 expense creditors incur to collect past due accounts, and that their risk of never collecting the account increases as the delinquency ages. Consumers can negotiate with creditors to accept areduced pay-off by offering a lump-sum payment of the entire balance. The debt settlement industry became established in the US following bank deregulation of the late 1980s that loosened consumer lending practices. The industry has exploded in recent years as over-extended consumers were caught up in the slowing economy and Congress passed new bankruptcy regulations.

Bankruptcy reform made it more difficult for debtors to discharge debt. The legislation introduced a ‘means test’ by which the courts could determine whether the debtor qualifies for a Chapter 7 debt discharge and liquidation of assets or the Chapter 13 debt restructuring program that requires debtors to repay some or all of their debts to unsecured lenders. The court mandates repayment rates and the term based on debtors’ ability to pay. Those who earn below the median income level receive a 3-year payment schedules and those above pay for 5 years according to IRS guidelines.

By enrolling in a debt settlement program (DSP), the debtor executes a Limited Power of Attorney agreement authorizing the debt settlement company to negotiate with creditors in their behalf. Most firms will advise the debtor client to forego debt payments while negotiations are underway and, instead, save that money towards payment of the lump sum and the debt settlement firm’s fees.

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