Best and Worst Debt Relief Moves (Part 3)

What is bankruptcy?

-Bankruptcy is a legal declaration of the inability of an individual or organization to pay its creditors.

-Bankruptcy is a federal court proceeding in which a consumer may obtain protection from the creditors. There are two general types of bankruptcy: voluntary bankruptcy or liquidation bankruptcy (Chapter 7) and involuntary or reorganization bankruptcy (Chapter 13).

A voluntary bankruptcy is initiated when a consumer files a petition in court, while in an involuntary bankruptcy it’s the creditor that forces the consumer into filing.

How does a bankruptcy start?

Under the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA, which amended the U.S. Bankruptcy Code, in October 17, 2005, the consumer must first undergo a mandatory credit counseling course (under a court approved credit counseling entity) before filing bankruptcy.

–>Upon completion and if  it was decided that bankruptcy is the best and only solution for the consumer’s debt situation, he/she fills out a form, which is a request to the court to make his/her declaration of bankruptcy legal.

–>With the filing there is a fee to be paid to the courts.

What is mandatory credit counseling?

The mandatory counseling makes sure that the consumer knows that he/she has options other than bankruptcy.

The credit counseling agency must be:

–>Approved by the U.S. Trustee’s office.

–>Completed within 180 days before filing bankruptcy.

This pre-bankruptcy counseling session should include:

–>An evaluation of the consumer’s financial situation

–>A discussion of the alternatives to bankruptcy.

–>A 2-hour course on personal financial management (budget counseling).

 

The consumer at the end of the program must have:

–>Counseling Completion Certificate  (pre-filing)

–>Debtor Education Completion Certificate (post-filing).

What is the consequence of failure to obtain those certificates?

–>If the consumer is unable to complete the course and failed to obtain a Debtor Education Completion Certificate within the required deadline, the case may be dismissed by the court and the bankruptcy will not be discharged.

 

Is it possible to be excused from credit counseling?

–>The court excuses a consumer that is mentally incapacitated or in a military combat zone.

–>Even if an appropriate agency is not available in the consumer’s district and/or the consumer has physical disability that prevents him/her to travel, he/she may not be excused from class, as it is also available by phone or online.  If the consumer prefers to not travel and instead take the last two options, they must first clear it with the Trustee.

–>Another way to avoid attendance is if the consumer can prove to the court that they must file for bankruptcy immediately: to stop an urgent move by the creditor, like wage garnishment and/or the consumer was not able to obtain counseling within five days after they’ve requested for it. The consumer has 30 days to prove the immediacy to the court and 15 more days if they are granted an extension.

What is Chapter 13?

It is that chapter that allows the consumer to pay back all or at least a part of his/her debts as directed by the Bankruptcy Court.

A consumer filing Chapter 13 must be aware of the impact of bankruptcy to their credit report.  That it stays on for 10 years after the debts have been discharged and that it may also cause higher interest rates on future loans. Not only that, Chapter 13 Bankruptcy relies on the consumer’s income, which the repayment plan will own for three to five years, so the consumer has to make sure that it is the only option left for them and that they have really exhausted all avenues to debt relief.

Under Chapter 13 bankruptcy, the consumer deals with the court appointed trustee. The trustee will oversee the consumer’s financial affairs and payments, as well as its distribution to the creditors.

What happens after the bankruptcy is discharged?

Once the consumer completes the three to five year repayment plan, has remained current on their income tax returns, child support, alimony payment, and has obtained the mandatory budget management course, the remaining unpaid balance on the debts that qualify for discharge are going to be wiped out. The consumer is no longer responsible for the discharged debts.

What is Chapter 7?

1.      Chapter 7 bankruptcy (which is sometimes called a straight bankruptcy) is a liquidation proceeding, in which a consumer turns their non-exempt properties to the bankruptcy trustee, who would then distribute the proceeds of the liquidation to the creditors. The bankruptcy would be discharged from all dischargeable debts in the span of three to five months.

But because of the amendments in the bankruptcy law in 2005, this bankruptcy chapter is no longer that accessible to consumers. They are instead forced to file Chapter 13 instead of 7, because a Chapter 7 requires for the consumer to pass their state’s income test or Means Test.

2.       Chapter 7 bankruptcy is liquidation proceeding wherein the consumer receives a discharge of debts within four months. The consumer pays the debts out of their non-exempt assets. They relinquish those assets to a trustee (court-appointed official) who then converts them to cash for distribution to the creditors, or the trustee turns the assets over to the creditors.

A Chapter 7 discharge can only happen once every six years and not everyone is eligible for debt relief under it. The eligibility for a Chapter 7 bankruptcy is based on the “means test” or the income based test.

 

 

 


Best and Worst Debt Relief Moves (Part 2)

So if taking out a loan for unsecured debts sounds like a bad move, what is the alternative? For unsecured debts, there are debt consolidation programs available, depending on the total balance and account status.

1.       Credit Counseling (Debt Management Plan) – Credit counseling is the education of consumers regarding budgeting and spending. It is a debt relief program that assesses the consumer’s financial situation, to determine what can be done about their financial issue, and find out if an enrollment Debt Management Plan is possible.  The Debt Management Plan is a program for credit card balances that are not that high. How much is not that high? A total credit card balance of less than $10,000. The other qualification into a DMP is a current account status.

A DMP negotiates the consumer’s interest rates and it’s not about reduction of the balance itself.  Consumers who are interested in this program, or those who think they can qualify for it, must have a steady stream of income in the next 5 years. The program runs for 3 to 5 years and it usually has a clause about a skip in payment. In a DMP the creditor reserves the right to kick the consumer out of the program should they skip-even just one payment.

 

-> The credit card companies can jack the interest back up to the default rate, which can be as high as 32 percent, if the consumer skips even just one payment.

 

 

Is credit counseling free?

 

Yes, supposedly, but some companies may charge a maintenance fee.

 

Is DMP free?

 

No. A DMP would cost the consumer, the lowest would be $25/month. In the recent ruling against debt relief companies, non-profit credit counseling companies were exempted from the advanced or upfront fee ban. Credit counseling companies that are listed as “non-profit” aside from the said exemption have also the tax-exemption privilege from the IRS.

 

->On the average the set up fee is more or less $50 and the monthly fee is around $35.

->This fees vary from company to company and from state to state (consumers can check for state regulations). It is also based on the number of creditors the consumers have.

How does it work?

 

->The consumer pays a single monthly payment to the credit counseling agency.

->That monthly payment should be lower than the combined minimum payments. While the overall savings can be larger because of the reduced interest rate.

->The agency distributes the payment to the creditors.

->Typically the program lasts for 3 to 5 years.

->While the consumer is in the program, the creditor reports it to the major credit reporting bureaus. But once credit counseling is done, the credit report should not reflect it anymore.

 

2.       Debt settlement – Debt settlement is the negotiation of the entire balance down to more or less half of its original amount. Unlike credit counseling, which negotiates just the interest rates, debt settlement goes after the whole bill itself.

 

Is that even legal or possible?

 

It is very legal and many consumers have benefited from it. The reason why many consumers or the public doesn’t know that it’s possible to negotiate their balances with the creditors—is just good old business. Of course creditors wouldn’t announce that they are amiable to a settlement. In fact, even if it’s legal, they make it hard for consumers who are still current in their accounts to settle for close to half of the original amount. They might agree to settle though, if the consumer would pay a lump sum payment of 75% of the total debt amount. And as you have guessed, that doesn’t always happen, as consumers who are desperate to eliminate their debts and have run to debt settlement companies for help—don’t have that kind of money.  The settlement company, as part of the program, helps the consumer save up for negotiations.

How does it work?

The settlement company sets up an account for the consumer on a third party financial agency. One of the more popular of which would be Noteworld. The settlement company cannot and would not withdraw the money that has been deposited there because the right to release funds lies solely with the account holder—which is the consumer. What the settlement company can do is check the status of the savings or with the consumer’s consent, tell Noteworld to release funds to the creditor that has agreed to a settlement.

The recent regulation on debt relief companies pointed at this practice, because some debt settlement companies in the past, were able to deceive their clients regarding this set up. After October 2010, all for-profit debt relief companies are subject to this third party set up rule.

But the major rule that came out of that debt settlement regulation is the ban on advanced fees—until after a debt settlement has been reached. Many, if not all, settlement companies felt that it was an unfair ruling because they claim that work is already being done for the consumer, even before a settlement is reached with the creditor, and if that’s the case—who would shoulder the expenses. FTC’s answer is: The debt settlement companies.

How much does debt settlement cost?

It’s 15% of the total debt amount spread out over 18 months or 20-25% of the settlement amount. If it sounds high, take note of the fact that the qualification for this program is a total debt amount of $10,000 or more and on past due accounts.

How does it affect the credit score?

When consumers contact a settlement company for debt relief, it means that they have already missed payments and what they owe is probably already near if not more than $10,000. That means that the –(35% ) Payment History and (30%) Amount Owed– the portions of their credit score are already damaged.

That means that those segments can only improve after they’ve completed the program and eliminated their debt.

How does  debt settlement reflect on the credit report?

A debt settlement appears on the credit report as “settled”, “settled for less than the full balance”, or “settled in full.”

So if what you have is mostly unsecured debts, don’t take out loans that would just add up to your debts, but instead consider either credit counseling or debt settlement. The worst debt relief solution for credit card debts that have not been served a legal action yet, is bankruptcy.


The FTC and Debt Settlement

A collector calling your house and work non-stop, another contacts the people around you to get to you, and your neighbors said that they have been threatened by another collector with a lawsuit – and you, you don’t know what to do or who to call, except that those don’t sound right. So who do you run to for consumer-related issues like collection?

The FTC or the Federal Trade Commission.  Princeton online describes the FTC as an independent agency of the United States federal government that maintains fair and free competition; enforces federal antitrust laws; educates the public about identity theft.

Their own site says that when the FTC was created in 1914, its purpose was to prevent unfair methods of competition in commerce but over the years the commission has passed prohibitions against unfair and deceptive practices. The Commission now also directs and administers many consumer protection laws.

The FTC and Debt Settlement

In 2009 the FTC has received numerous complaints about deceptive and underhanded practices in the debt relief industry, particularly in debt settlement.  During that time, debt settlement was largely unregulated, due to it being relatively new in the scene. Consumers then were advised to check the business’ standing with the Better Business Bureau before signing up – but of course, most don’t, out of desperation. They just really want to get rid of their credit card debts as quickly as possible, but unfortunately, just like in every business, dishonest entities abound – and so are taken advantage of. Most of the complaints were about the fees and how they paid for nothing. Debt settlement companies used to charge customers an upfront fee plus monthly fees—whether or not they are a member of the BBB.

Having a good standing with the BBB doesn’t guarantee that a debt settlement company would work well for the consumer – it’s really a case to case basis or should be a debt relief match. The consumer must really submit his case to the settlement company, to be assessed and properly analyzed.  This is important because sometimes a consumer doesn’t need settlement but a more drastic solution, like bankruptcy.

So what are the signs of a legitimate debt settlement company, aside from a BBB membership?

-The settlement company’s program must have a fast completion time. 12-36 months.

-The program must be able to protect and improve the consumer’s credit standing.

-Must also have a good standing with the Chamber of Commerce

-A Member of TASC – The Association Of Settlement Companies and the IAPDA or the International Association of Professional Debt Arbitrators

The new rules on debt settlement

 

The Federal Trade Commission announced its final verdict on debt relief companies’ policy on advanced fees. They have implanted an advanced fee ban.

The amendment was effective October 2010, and is applicable to for-profit credit counseling, debt negotiation, and debt settlement companies—but not to non-profit companies.

*For-profit companies that sell debt relief services over the telephone may no longer charge a fee before they settle or reduce a customer’s credit card or other unsecured debt.

Specifics of the advanced fee ban:

-companies may not charge for services not until after they successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts;

- companies may not charge for services not until after there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and

- companies may not charge for services not until after the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

Specifics on “dedicated account.”

-the dedicated account is maintained at an insured financial institution;

-the consumer owns the funds (including any interest accrued);

-the consumer can withdraw the funds at any time without penalty;

-the provider does not own or control or have any affiliation with the company administering the account; and

-the provider does not exchange any referral fees with the company administering the account.

 


Best and Worst Debt Relief Moves (Part 1)

There are a lot of materials about debt relief out there for people to choose from – especially online, but not all of them are edited or checked for quality or affectivity—unlike published books. But that’s not to say that an effective and sincere advice don’t exist online. People would just have to really dig deeper into their subject, may it be credit counseling, debt settlement, or even bankruptcy. It’s good to have several sources before making a conclusion.

Eliminating huge credit card balances is a big move. It is different from just managing them and paying the minimum. Anybody that’s considering debt elimination, instead of just debt management, feels that they won’t be able to keep up the minimum payment or any payment at all in the future—and so thinks that all balances should go, once and for all.

One of the worst debt relief moves would be to file a bankruptcy, on just unsecured debts, with no legal obligation or attached judgment lawsuit.  The Bankruptcy forum offers consumers what they call, “Automatic Stay” provision, which prohibits all collection activities against the consumer (judgment case, foreclosure, eviction, etc.)—for as long as the case is in court.

Why is bankruptcy one of the worst debt relief moves? Not only is bankruptcy expensive, it is also tedious, and stressful. The amount of paperwork and the meetings alone should be enough for consumers to be discouraged in filing it, because one wrong information or a missed meeting, can and will cause them the whole case. This is especially true for those who are thinking of filing d.i.y. or without an attorney representation. The court would treat the consumer as an expert in bankruptcy (like a bankruptcy lawyer) in the forum and therefore would not accept errors.

Nowadays, that is since the 2005 revision of the bankruptcy laws, consumers are forced to file Chapter 13 bankruptcy or reorganization bankruptcy, rather than Chapter 7 or liquidation bankruptcy. For consumers to be allowed in a Chapter 7 bankruptcy, the state’s income test (Means Test) must first be passed. A Chapter 7 bankruptcy stays on the credit report for 10 years and a Chapter 13, for 7 years. Both chapters can stay on public records for 20 years.  Not only is a bankruptcy bad on the credit report, a consumer usually recovers from a bankruptcy, only after 2 years (more or less). This is not to say that consumers should not file bankruptcy, not at all, only that a bankruptcy is more effective in financial situations other than elimination of simple unsecured debts.

For an unsecured and secured debt combination, it’s still also possible to not file bankruptcy, but instead take out a loan. But consumers with a very bad credit status are not advised to take out a loan because of the high interest rates attached to them. But if it can’t be helped, taking out a loan is still better than a bankruptcy.

For unsecured debts, there are debt consolidation programs available, depending on the total balance and account status.


Debt Relief In Chicago (Part 2)

What does the Illinois Collection Agency Act state?

 

Most of Illinois laws regarding collection adhere to that of the FDCPA,  but there are some items in the Illinois Collection Agency Act that are local to the state.

All collection agencies operating in Illinois must register with the Illinois Department of Professional Regulation to be able to collect.  Exempted from this are companies that are already operating in the state (or those with their own collection department). They don’t need to register with the Illinois Department of Professional Regulation anymore if their business has a license to operate.

But even if that’s the case, all collectors are still not allowed to do the following:

-Add fees or interest

-Make threats or perform any sort of abuse (verbal or written) towards the debtor

-Engage in harmful, unethical, dishonorable behavior.

-Make false statements to trick or force a debtor to pay (like stating to the debtor that they have committed a crime and will be arrested if they don’t immediately pay).

The State also limits the amount of communication between collector and debtor. The Illinois Collection Agency Act  states that debt collection agencies may not contact or call a debtor between 9 p.m. and 8 a.m. They may also not do this with the debtor’s relatives or family.   At work, the debtor must be in arrears for 30 days or more before the collection agency may contact the debtor’s employer.  The collection agency also not  divulge the details of the debt with a third party nor publish it anywhere.

The Act doesn’t debtors who are behind on child support payments.

 

What is debt consolidation or debt settlement?

Debt consolidation or debt settlement is a debt relief program for unsecured debts, particularly credit card debts. The program runs for one year to three years, depending on how fast the consumer can save and how quickly an agreement with the creditor is signed by the settlement company. When the settlement company negotiates the entire balance, how it appears on the credit report is also negotiated—the aim is to get the creditor to agree to accept the settlement amount as payment in full.

A debt settlement appears on the credit report as “settled”, “settled for less than the full balance”, or “settled in full.”

Regarding the fees, it used to be that debt settlement companies  charge 15% of the total debt amount  spread over 18 months—but with the new debt settlement rules on upfront fees in effect (October 2010) they may no longer charge a fee, without settling a debt first. Another fee structure is  20-25% of the settlement amount.

A debt settlement, like a Chapter 13 bankruptcy, stays on the credit for 7 years—and it cannot be removed legally until then. Regardless of what credit repair companies may claim. But unlike Chapter 13, which stays on public records for 20 years, debt settlement would not at all show in the public records.

What to look for in a settlement company?

-The settlement company’s program must have a fast completion time. The ideal frame is 12-36 months.

-The program must be able to protect and improve the consumer’s credit standing.

-It would be a good thing if the company has a good standing (although it’s not a must) with the Better Business Bureau (BBB) and has been in operation for at least 5 years.

-The company must also have a good standing with the Chamber of Commerce

-Must be a member of The Association of Settlement Companies (TASC) and the International Association of Professional Debt Arbitrators (IAPDA).


Debt Relief in Chicago (Part 1)

The State of Illinois doesn’t have any special laws regarding debt relief, apart from that of the Federal Trade Commission (FTC), but consumers should still learn their rights under the Federal Fair Debt Collection Practices Act (by the FTC), the Illinois Collection Agency Act and the Illinois Consumer Fraud and Deceptive Practices Act.

 

What is debt relief?

 

The term probably originated in the international economic debt relief circles—and it probably means “aid” or help for struggling economies.

Under the Fair Debt Collection Practices Act (FDCPA) a debt collector may contact the debtor in person, via the home phone or mobile phone, in a telegram or the regular mail. But, they may not do so at an inconvenient time and locations, especially if they were previously instructed not to do so. They may not also contact the debtor before 8 AM or after 9 PM–unless they were given permission to do so.

 

Do debt collectors really show up at the debtor’s residence though?

Showing up at a debtor’s residence just for a credit card debt is rare, because although not prohibited, what creditors/collection agencies do to collect from a hard to locate/contact debtor is sue them for a judgment instead.

 

But what does it mean when a debt collector shows up at the debtor’s doorstep?

It means that the collection agency must really be near the debtor’s place that the debt collector can just drop by. If the address on their letterhead says otherwise, it should alarm the debtor to a possible debt collection scam.  There are a lot of dubious entities out there that would try to sneak in between the legitimate collector and the debtor.

 

How would debtors know if they are talking to a legitimate debt collector?

Debtors should know that a legitimate debt collector (with whom the creditor has assigned their account to) would first call about their intention to collect. And within 5 days of that first contact, they would send written version or a letter containing the exact amount owed, the creditor’s info, and what  can be done should the debtor  want to have that debt validated.

The key words are DEBT VALIDATION. If the debt is not validated, the debtor is not obligated to pay it.

 

What if the debt is validated but the consumer doesn’t have the funds yet to pay?

The debtor should consider a debt relief called debt negotiation. Depending on the amount of debt and the status of the account, the debtor can avail of either of the two debt relief programs: debt settlement and credit counseling.

 

Which is the best program?

For high credit card debt balances ($10,000), debt settlement is the better choice, for the simple reason that creditors won’t find it feasible to lower the balance of a low debt amount. Debt negotiation or debt settlement is also the better option for accounts that are near or already past due, because creditors would rather take something (via the negotiation) than nothing, from a charged-off account.

What does charge-off mean? The IRS requires creditors to write-off debts that are unpaid for 5 to 6 months straight , so even if they lose profit, they gain a tax break.

 


Comparing Credit Card Offers

It doesn’t seem to matter to many credit card providers  if the economy is in recession or has just been to one–the way they come up with various offers and schemes to get consumers to sign up.   Even if the consumers are coming off of a bankruptcy, or a credit card debt relief program, many creditors seem to still think that they’re worth the risk– as evidenced by the number and variety of credit card offers out there. But consumers should know that whatever opportunity creditors see in their not-so-ideal set up, doesn’t extend to them, and so it’s best if they know their way around credit card offers.

What are the basic features of most credit cards that consumers should examine before signing up:

Number would have to go to the interest rates:   for those who can’t afford to pay in full each month, the rule is the lower the better, as simple as that. But for those who can afford to pay in full, the rule “the lower the interest rate, the better” may not apply because they are not paying any interest anyway–plus lower rate cards (6-7%) offer fewer rewards. They also have steep qualifications like excellent credit standing and proof of income. Not only that, it can also take up to 30 days for the application to be  approved.

And speaking of rewards, credit card providers offer a variety–from cash back cards, to travel rewards, to a gas  rebate card. It’s not hard to actually know which card provider can offer you what you need. If you travel a lot of miles to get to work, then go with the one that offers gas rebate cards. But otherwise, the best offer in general would be the cash reward card, because then you’d be free to use the money anyway you want (you can even apply it to pay off some debt or save), unlike in those other cards–whose usage is defined. But if you choose a card with a cash back reward, make sure you know when the rates change or for how much.

In line with rewards is the sign-up deals. Consumers must remember that it’s a one time offer and should not be the main reason why they are signing up for a card, and much like in rewards, getting the best out of it is a per lifestyle basis–if you’re a frequent flier and they offer a travel reward, then it might be a good deal for you.

It’s the same with introductory interest rates. Consumers should be careful with 0% on balance transfer and purchases-on the first year-offers. For balance transfers, some credit card providers charge consumers 3% of the amount that’s being transferred. It’s not the same with purchases though, which is at 0%, because they still get a transaction fee from the retailer.

Other fees and annual fees.  For those who have a frequent traveler’s lifestyle, paying for annual fees for a travel reward may make sense, but not for the others. Some of the other fees are over the limit fees, late payment fees, balance transfer fees, and cash advance fees.

It used to be that the credit card providers can lower and spike those fees at will, but thanks to the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, they are now in check (although not eliminated). That law states that:

-The credit card company can only increase the interest rate if the consumer’s payment is 60 days late
-Unless the consumer has asked for an over-limit fee, the creditors can’t charge the consumer for it. Also, banks may not charge late fees if they were also late in crediting a payment.
-Credit card companies may not market to people under the age of 21, without parental permission, or verification of their ability to pay.
-Credit card companies must give the consumers 45 days before they can up the interest rates.
-The consumer’s payment must first be applied to the highest interest rate balance.


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