THE ATTORNEY GENERAL OF TEXAS
Ken Paxton

Debt Management

Have your debts gotten out of hand? Let's say that, for whatever reason, you find yourself with more than one credit card that is carrying a balance you can't pay off all at once. In addition, you are still making payments on a car, and then you had some unexpected expenses (health-related, for example, or repairs) that you owe money on.

After a point, debts become expenses in themselves, as interest compounds and missed payments lead to late fees. How can you get back on track?

There are several available options for consumers- credit counseling and debt management plans, debt consolidation, and debt settlement are strategies that sometimes make sense. Depending on your situation, these options may be able to assist you in lowering your payments or interest rates and reducing the amount you ultimately owe.

 

Credit Counseling Services

Credit counseling can be a good option if you are interested in re-evaluating your spending and saving habits, as well as entering into a debt management plan (DMP). A DMP allows you to continue making monthly payments to your creditors, but consolidates your payment into one lump sum that you pay the credit counselor each month. This amount is then distributed to your creditors, often at reduced interest rates - allowing you to get out of debt faster.

Be careful in selecting a counseling service. Some are non-profits, while others are for-profit. Make sure you check with the Office of the Consumer Credit Commissioner and use a licensed credit counselor. Ask what services the company provides - some will perform in-depth evaluation of your monthly expenditures while others are simply calling DMPs. These services can carry both initial and monthly fees - find out exactly what you will be paying and where your monthly paymernts will go. Ask for monthly accounting statements so you continue to keep track of your debts and what your current balances are. Before signing up, ask how long your repayment plan will be so you know exactly when you are expected to be debt free. And remember, some of these services may be scams - make sure you do research on the company you choose and that you are comfortable that is trusted and reliable. The Federal Trade Commission (FTC) offers a brochure on choosing a credit counselor.

 

Debt Consolidation

Debt consolidation is an option if you want to take out a new loan to pay off your existing debts, eliminating your prior debts and leaving you with one monthly payment.

Remember to factor in the term of the new loan (how long you will have to make payments) as well as the interest rate and the amount of the monthly payment. Even a low payment with a good interest rate can add up to a lot of interest if the pay-out is spread over a long period of time. When you borrow money, the lender must disclose to you how much you will pay in interest over the life of the loan. It is in your best interest to pay down your debts as quickly as possible.

If a debt consolidation loan can help you get control of your finances before you have begun to miss payments, you may be able to avoid or minimize damage to your credit rating.

Remember to use caution in choosing a company. Look out for the usual red flags, like extravagant promises that your debts will be forgiven and that you can get out from under a mountain of debt with very low payments. Be suspicious if the company offers low interest, easy credit, guaranteed-to-qualify loans, especially if you have a poor credit history. Also remember that no lender can charge you a fee in advance of funding a loan.

 

Debt Settlement/Negotiation Companies

Debt settlement is a new form of relief that promises quick results to get you out of debt. In a debt settlement program, you stop paying your creditors altogether, and save the monthly payments you were making in a savings account. Once you have saved sufficient funds, the company will contact your creditor, and negotiate a lump sum payoff of your debt, often for a significantly reduced amount.

Use caution in selecting a debt settlement company - because you will stop paying your debts your credit will decline and you may be faced with extreme collection efforts, including having lawsuits filed against you. Debt settlement companies often do not have lawyers available to assist you in those situations. You will also likely have to pay high fees to participate in the program - find out what your total costs are and who is receiving your money. Make sure you find out who is responsible for saving your money in the program - some require you to send monthly payments to the company or to a third party, while others require you to simply open your own bank account. And even if you save significant amounts in the program you may owe income taxes on the amount of "forgiven" debt.