Consumer Debt Relief Information
Unforeseen circumstances, such as a divorce or job loss, can result in an individual's debt level going from manageable to overwhelming. For consumers who struggle daily with debts they cannot pay, debt relief can offer affordable repayment plans that allow the consumer to recover financially. In addition, debt relief can reduce the worry and stress an individual may suffer because of debt problems.
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Function
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The function of most debt relief programs isn't to eliminate debt entirely but to restructure debts to make them easier to repay. A good example of debt restructuring is Chapter 13 bankruptcy. Consumers who opt to file for Chapter 13 bankruptcy have the opportunity to repay their creditors according to their income levels rather than the minimum payments demanded by creditors. Debt relief should allow the consumer financial breathing room while also permitting the creditor to recover at least a portion of the amount the debtor owes.
Types
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Debt can be classified as either secured or unsecured. Secured debts provide the creditor with the option to repossess collateral if a consumer fails to pay the debt. Unsecured debts, such as medical bills, allow the creditor no such option. Due to the risk of property loss, debt relief for secured debts often comes in the form of modifying the terms of the individual's original loan. Unsecured creditors, due to their inability to repossess collateral as payment, may agree to offer the consumer a debt settlement or reduce his interest rate to make the debt easier to pay off.
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Time Frame
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For old, unsecured debts, a consumer's state laws may offer her significant debt relief. Each state in the U.S. places a statute of limitations on unsecured debts. After the statute of limitations passes, the creditor no longer has the legal right to file a lawsuit against the debtor. This protects consumers from being forced to pay old debts. In the event that a creditor attempts to file a lawsuit against the debtor to obtain payment, the debtor may inform the court of the expired statute of limitations to have the lawsuit dismissed and prevent such consequences as wage garnishment or property liens.
Considerations
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The Federal Trade Commission recommends that consumers seeking debt relief consider visiting with a credit counselor to evaluate their financial situations. Credit counseling agencies can work with creditors to negotiate interest rates, balances and affordable repayment programs. The FTC warns consumers to avoid debt negotiation firms, as these companies may charge a percentage of each individual's debt to negotiate a settlement and often make false or misleading guarantees. Government-approved credit counseling is a requirement of all individuals hoping to find debt relief through bankruptcy.
Warning
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While debt relief options may vary, depending on an individual's situation, many such options damage credit scores. Bankruptcy, for example, can reduce an individual's credit score by as much as 300 points. Settling debts for less than the full amount owed results in the debtor's credit report reflecting that the debt was "settled" rather than "paid." Future lenders see this notation and consider the consumer a higher lending risk. Even credit counseling appears on a debtor's credit report. Thus, consumers seeking debt relief should consider the credit consequences before choosing a program.
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References
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