Three Factors to Consider in a Debt Management Program

If you have found yourselves mired down in debt with maxed-out credit cards, your first step is getting together and developing a budget that starts chopping away at that stack of bills. Debt management includes other options if you're seriously in trouble. Which method: credit counseling, debt consolidation, debt settlement or -- heaven forbid bankruptcy -- depends on several factors.

Secured
You may have seen the reality TV program Pawn Stars. Pawning is a simple definition of a secured debt. You take your engagement ring set and give it to the pawn shop for a pre-determined length of time in exchange for a loan. When you pay back the loan you get the rings back. If you don't pay the loan back, the pawn shop keeps the rings. The lenders for secured loans such as cars, boats, furniture and your house are not usually agreeable to any sort of debt management solutions. You don't pay, you lose the asset. The exception would be a home mortgage lender which may be open to loan modifications.

Unsecured
These are credit cards, store cards and personal loans. There is nothing for the lender to repossess if you default on the loan. Most creditors when faced with the reality that the debtor is in trouble are willing to work with you. Getting something for the loan is better than no payment at all. Creditors, both secured and unsecured review your credit report on a regular basis. It's obvious which are getting paid and which aren't. The collection efforts may increase from those that are getting farther behind.

How Much You Owe
A few thousand dollars in credit card balances might seem frightening to someone who is used to paying their balances in full every month. You might just have to tighten your belt a little and use the extra money from reducing expenses to get rid of the debt within four or five months.

The story is different if you find yourself only being able to make the minimum payments. If that's the case, credit counseling may be the answer. The counselor will work with you to come up with a budget that allows a hefty payment to your creditors. He'll then work with the unsecured creditors to get them to waive any late fees, decrease the interest rate and accept your new payment arrangements. Debt settlement is asking the creditor to accept a partial payment as payment in full. If they feel there's a good chance you'll declare bankruptcy they may be willing to take the partial payment.

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3 More Factors You Should Consider in Debt Management

Are you slowly sinking below a flood of debts? Are your credit cards maxed out and you can only make the minimum payments? If so you should consider starting a debt management program. Your first step is gathering all your financial information and creating a budget that begins to chop away at that stack of overdue bills. Debt management includes: debt consolidation, credit counseling, debt settlement and as the last resort bankruptcy.

How Much Debt
Take a good look at how much unsecured debt you have. If it's only a few thousand dollars it might take just six months to pay it all off. Debt over $10,000 requires more intensive action. If your total debt compared to your income is more than 30 percent of your income, you are in trouble. Credit counselors will set up a budget with you and then negotiate with your creditors to lower the interest rate, waive late payment fees and membership fees. They do not negotiate to decrease the amount owed. If you do that it's called debt settlement.

Income
You might not think income has any impact on debt management but it does in the sense that creditors can garnish up to 25 percent of your wages if they win a judgment. Rather than settling with you for less than what you owe, or agreeing to spread out payments, the creditor may decide to pursue litigation. Income is not reported on your credit report. However, if you are going through debt settlement or credit counseling, creditors can find out through the budget paperwork you complete.

Your income also affects whether you qualify for a Chapter 7 bankruptcy or must go for a Chapter 13. The difference is the Chapter 7 gives you a fresh start the minute the bankruptcy is finalized while the Chapter 13 is a three to five year repayment plan of your debts. That repayment plan pays off as much debt as your discretionary income allows.

Assets
Your bank accounts, stock portfolio, house, car and personal property are at risk if a judgment is obtained by a creditor. The creditor will obtain a court order that requires you to disclose all your assets. The credit counselor may encourage you to sell assets and put the proceeds towards the debt. If you declare bankruptcy, the assets that are not exempt may be sold by the bankruptcy trustee and used to pay down debt. The exemptions vary by state. Florida allows you to exempt all the equity in your home while Arizona only allows up to $150,000.

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