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Consumer Guide To Understanding
Debt Consolidation, Debt Management, Debt Settlement & Credit Counseling

Consumer Credit Counseling Services

If you're way over you head in debt and cannot manage you monthly debt service, perhaps it's time for consumer credit counseling. Most Consumer Credit Counseling Services are non profit organizations established to provide financial assistance to consumers at little or no cost. They work directly with creditors and will work out a manageable program to get you out of debt.

In addition, they offer debt counseling services, typically at no cost, to ensure that debtors learn how to manage their credit card debt and other financial affairs. A debt counselor may suggest enrollment in a debt managment program.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 requires individuals seeking bankruptcy relief to undertake credit counseling with an approved counseling agency prior to filing a bankruptcy petition and to undertake education in personal financial management from an approved agency prior to being granted a discharge of debts under either Chapter 7 or Chapter 13. Consumer Credit Counseling Services can be found throughout the U.S. and most consumers might be better served finding a local agency.


Debt Consolidation

There are various ways to consolidate debt. For some, a >Debt Management Program is a great solution. These programs are offered by non profit Consumer Credit Counseling Services and are typically approved by most creditors. Consumers who have home equity, and who are in need of some debt relief, may wish to consider a Debt Consolidation Loan. However, sufficient equity is required to obtain a debt consolidation loan, and if you default on the loan, sadly, you could lose your home.

If you do not have sufficient home equity, or some other form of equity, it may be impossible to get a debt consolidation loan. If this is the case, for those consumers who are deep in debt, enrollment in a Debt Management Program may be their only viable option. Doing so will likely provide credit card debt relief, while providing a means to become debt free over time.

Other options to get out of debt include Debt Settlement, and as a last resort, Filing Bankruptcy. We discuss all of these options, as well as Credit Repair and Credit Reports in this consumer guide.


Debt Management Program

For most consumers facing financial hardship a Debt Management Program offers the best and most effective solution for credit card debt relief. Many creditors have hardship programs in place that offer special repayment plans to customers who undergo financial hardship. These special programs are typically offered through nonprofit consumer credit counseling services and are referred to as a Debt Management Program.

A Debt Management Program primarily benefits consumers who have accumulated a minimum of $5,000 in unsecured credit card debt and are unable to make the required monthly payments. Most credit card debt management programs reduce monthly payments, reduce interest rates, stop late fees and most important, will re-age the accounts that are placed in the program, bringing them in good standing.

A credit card debt management program offers an opportunity to those enrolled to become debt free in four to five years. Debt relief is also made possible through savings that may be achieved thru interest relief and the process of re-aging accounts, thus eliminating expensive late fees and other punitive charges.

While there are other options available for debt relief, it is our experience that a credit card debt management program offers the best opportunity to debtors to get a fresh start and get out of debt.


Debt Settlement Services

A Debt Settlement is a process used by both debtors and creditors to settle a debt for less than what is owed. The process is also called Debt Negotiation, Debt Reduction and Debt Arbitration. Most often the process is used to negotiate a credit card Debt Settlement.

If negotiated properly on behalf of the debtor a debt settlement can quickly and dramatically reduce the debtor's debt. Debt settlements range from 30% to 70% of the current debt, with the typical debt settled for 45 cents on the dollar. After paying agency fees, a typical client realizes a savings of around 40% of their original debt placed in the program. Most debtors resolve their debt within 1-3 years!

Debt Settlement Programs and fees can vary greatly depending on many factors, including the skills of the debt settlement negotiator, creditors, and the credit card debt settlement company.

While some debtors may want to negotiate their own debt settlement, it is usually best working through a professional debt settlement company who knows the ropes and can watch out for the debtor's best interest. There is definitely a right way and a wrong way to handle this procedure.


Filing Bankruptcy

Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organization).

The most common types of Bankruptcy for individuals are Chapter 7 and Chapter 13. In Chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. In exchange, the debtor is entitled to a discharge of debt, except that the debtor will not be granted a discharge if he or she is guilty of certain types of inappropriate behavior (e.g. concealing records relating to financial condition) and except that some debts (e.g. spousal support, some taxes) will not be discharged even though the debtor is generally discharged from his or her debt. Many individuals in financial distress own only exempt property (e.g. clothes, household goods, an older car) and will not have to surrender any property to the trustee. The amount of property that a debtor may exempt varies from state to state. Chapter 7 relief is available only once in any eight year period. Generally, the rights of secured creditors to their collateral continues even though their debt is discharged (e.g. absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged).

In Chapter 13, the debtor retains ownership and possession of all of his or her assets, but must devote some portion of his or her future income to repaying creditors, generally over a period of three to five years. The amount of payment and the period of the repayment plan depend upon a variety of factors, including the value of the debtor's property and the amount of a debtor's income and expenses. Secured creditors may be entitled to greater payment than unsecured creditors.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 substantially amended the Bankruptcy Code. Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state's median income will not be required to pay back their debts. The new law also makes it more difficult for serial filers to abuse the most generous bankruptcy protections. Debtors seeking to erase all debts now have to wait eight years from their last bankruptcy before they can file again.

Among the many changes to the Consumer Bankruptcy law, BAPCPA enacted a "means test", which was intended to make it more difficult for a small number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code. Contrary to this intention, however, the Means Test often results in debtors more easily obtaining a discharge. If a debtor does not qualify for relief under Chapter 7 of the Bankruptcy Code, either because of the Means Test or because Chapter 7 does not provide a permanent solution to delinquent payments for secured debts, such as mortgages or vehicle loans, the debtor may still seek relief under Chapter 13 of the Code. A Chapter 13 plan often does not require repayment to general unsecured debts, such as credit cards or medical bills.

BAPCPA also requires individuals seeking bankruptcy relief to undertake credit counseling with an approved counseling agency prior to filing a bankruptcy petition and to undertake education in personal financial management from an approved agency prior to being granted a discharge of debts under either Chapter 7 or Chapter 13.


Credit Repair Clinics

Many consumers have the mistaken idea that credit bureaus are federally supported organizations backed by a vast array of laws meant to protect creditors. Nothing could be further from the truth. Aside from the government simply recognizing the need for credit reporting, credit bureaus have absolutely nothing to do with the government. Credit bureaus are simply huge bureaucratic companies which exist for the soul purpose of making money by selling information about you information they never bothered to verify.

Because of the vast potential for error in the credit reporting system, the United States Congress has enacted laws to protect the consumer from being victimized by the credit bureaus. It is your right and responsibility to make use of these laws, through the process often termed Credit Repair.

The Fair Credit Reporting Act charges the credit bureaus with responsibility to the consumer as well as the credit grantor. In reality, the credit bureaus resist, resent, and reject consumer disputes. The credit bureaus would rather be left alone to make a profit. And, each time a consumer challenges his credit, profit is lost.

The credit bureaus first defend their profits by erecting walls of stall tactics, including requests for more information, further clarification, and additional identification. The vast majority of consumers give up before they even receive copies of their credit reports. If a consumer manages to get a credit report, decipher the codified information, write a coherent dispute, and mail it, the bureaus may still find some reason to disregard the challenge. The entire dispute system is designed to frustrate and discourage the consumer.

Many consumers have the idea that the credit bureaus must complete their investigation within thirty days or be forced to remove all disputed information. They threaten to sue the credit bureaus if they don't conclude their investigation in time. In practice, such thinking is delusional. Nobody forces the credit bureaus to do anything. However, if you manage to submit a valid dispute letter, and the credit bureau investigates your dispute, the chances of success are good.

If a credit bureau cannot verify an item before completing its investigation, that item will be removed. Many creditor grantors are simply reluctant to take the time to verify the data. While the credit bureaus are in the business of reporting credit histories, creditor grantors are not.


Credit Reports, Experian, Equifax, TransUnion

Like it or not, the fact is credit reporting agencies gather information about us and sell it to banks, credit card vendors, credit unions, finance companies, insurance companies, employers and others. These companies use the information to verify and supplement the data provided by consumers in an application for a credit card, loan, insurance, housing, and employment.

Whether or not the applicant is approved, to a large degree, depends on what is contained in the credit report. To know where you stand, we suggest you get a free credit report online.

What is typically referred to as a Credit Report is more accurately termed "consumer report" by the Federal government. This is because "credit" is only one aspect of the report. Your consumer report contains personal data, employment history, detailed account information including a monthly transaction history, information that is reported by landlords, utility and insurance companies, doctors, hospitals and others.

Public records are also included on your credit report, for example, bankruptcy filings, lawsuits, court judgments, tax liens, foreclosures, judgment liens, mechanics liens, and criminal arrest and convictions. Inquiries by creditors and others are also listed on one's consumer credit report.

By law, all consumers are entitled to receive a free credit report online annually by each of the three credit reporting agencies: Equifax, Experian and Transunion. We suggest that you also check your FICO credit score at the same time

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