There are some companies out there that just know how to effectively market to folks in the middle of financial difficulties. Payday loan businesses are really good at this. In the case of payday loans, the fact that these lenders offer a service that traditional financial institutions tend to ignore – short term low value loans – doesn’t hurt either.
If you’ve been listening to radio ads lately or turned on your television for more than five minutes, chances are pretty good you’ve seen or heard an ad about how you can “settle your credit card debt for pennies on the dollar.” Some of these ads are pretty slick and possibly even intentionally misleading. They talk about the President’s “stimulus plan” that helps you to reduce credit card debt, and about “secrets” that “they” don’t want you to know.
(And, of course, anytime someone claims to have a secret that “they” don’t want you to know, watch out. They’re probably selling something, and it’s often a scam.)
The thing is that there is no magic fairy out there that’s just going to wave her wand and erase your credit card debt. It’s never as easy as it sounds, even if it is based on one small kernel of truth.
What is that kernel of truth? The fact is that, in some cases, you can settle credit card debt for less than what it’s worth. This practice is known as “debt settlement,” and it isn’t a secret formula or a magic bullet that you need to hire someone else to handle.
Credit card companies will sometimes accept as little as half the debt you owe. The thing is that you need to be able to pay them that amount in one lump sum. The chances are pretty good that, if you have that much in a lump sum, you wouldn’t be struggling with your credit card bills to begin with.
So, how do these debt settlement companies work? Usually, they have you put money into a bank account or a trust account. When the balance gets big enough, they contact the credit card company and make an offer of a lump sum.
Is this something you can do on your own at home? Of course it is. Is it a service that you need to pay someone for? Not usually. There really is little advantage to using this kind of a service except for the fact that the money you set aside into the bank account or trust account is kept out of your own reach, where you can’t get to it and spend it.…
Bankruptcy is out there for a reason. It’s there so that people that can’t afford to pay their bills don’t have to go to prison.
You see, back in the old days, it used to be that you could go to jail just because you owed someone money. When Scrooge ranted about “prisons and poorhouses” in Dickens’ A Christmas Carol, he wasn’t bluffing.
Not too long before those days, in the old, OLD days, someone could actually “own” you and your family if you didn’t pay back a debt. You literally would become a slave until the creditor decided that you’d worked long enough to pay back what you owe.
Today, bankruptcy is preferable to jail or slavery. In fact, bankruptcy doesn’t even carry the same social stigma that it did just half a century ago. During the recent financial crisis, many respectable people have found themselves facing bankruptcy.
Bankruptcy eliminates many of your debts. To file, however, you’re required to liquidate your personal assets in order to pay off some of the debt. The bankruptcy trustee will actually sell the personal property, and then she will use it to pay your creditors.
There are some assets that are exempt, such as a percentage of your home equity. The laws regarding bankruptcy can vary greatly from one state to the next, as well.
There are some downsides to filing bankruptcy.
Your credit history will be injured. It’ll be hard to get a loan, mortgage or credit card. It will stay on your credit report for as long as 10 years.
Your loan rates will be higher. When you do get a loan, expect to pay more for it. The exception is a payday loan, which has astronomically high loan rates anyways and generally isn’t based at all on your actual credit history.
Your retirement accounts may not be protected. Some retirement assets like 401(k) accounts are protected, and so is up to $1 million in an IRA. However, the law requires that only those assets needed to support a filer and dependents are exempted, so you may only be able to keep a portion of an IRA account.
Bankruptcy isn’t easy anymore. The Bankruptcy Reform Act of 2005 made it harder to file for bankruptcy and added more types of debt to the list that can’t be filed on.
There may be alternatives. You might be able to negotiate with a creditor or even work with a credit counseling service. Make sure to explore all of your options before you commit.…