Options for managing debt include self-help, debt management plans, debt consolidation, debt settlement, offer in compromise, and bankruptcy.
6 Options For Managing Debt
Self Help
Self Help is when you attempt to repay creditors by managing your cash flow. Self-help is useful only if you have money available in your budget to make credit card payments and are not being sued by your creditors. You would want to work out a written plan for repaying creditors and setting goals for incurring no new debt.
Debt Management Plans
Managing debt under a debt management plan (DMP), a third-party organization negotiates with your creditors on your behalf to set up a plan for paying off the debt. Payments are made to the agency, and that firm would then pays the creditors. If a debt management plan seems to be appropriate, advise the client to work only with a properly licensed DMP provider in your state. You can refer to the Federal Trade
Commission website at www.ftc.gov.
Debt Consolidation
Debt consolidation should only be considered for those who can consolidate debt with lower rate debt and NOT take on any new debt. If you consolidate unsecured debt with secured debt, such as a home equity loan, be cautioned that your home will be at risk if you fail to make payments.
Debt Settlement
Managing debt using debt settlement is a process in which a debt settlement company or a lawyer negotiates with your creditors in the hopes that the creditors will accept reduced payment in lieu of full payment. Debt settlement will advise you to save a stash of money to pay off your debt. An important aspect to remember is that any amount of debt forgiven is considered taxable income. Often time you may be able to settle an outstanding debt yourself. Our recommendation would be to settle an account on your own or with a lawyer’s assistance if necessary. If you consider a debt settlement firm, check the firm thoroughly through the Better Business Bureau.
Offer in Compromise
Offer in Compromise is an agreement between a taxpayer and the IRS that serves to resolve the taxpayer’s outstanding tax debt. The IRS has the authority to settle, or “compromise” federal tax liabilities by accepting less than full payment under certain circumstances.
Tax debt can be legally compromised for one of the following reasons:
Doubt as to Liability- There is doubt that the assessed tax is correct.
Doubt as to Collectability- There is doubt that an individual would ever be able to pay the full amount of taxes owed.
Effective Tax Administration- The tax owed is undeniably correct, there is no doubt that the amount owed could be collected, but an exceptional circumstance exists that leads the IRS to consider the taxpayer’s OIC. To be eligible, the taxpayer must demonstrate that the payment of the tax would create an economic hardship or would be unfair and inequitable.
Bankruptcy
Bankruptcy should be viewed as the last alternative to managing an overburdened debt load, although for some it may be the only alternative. Bankruptcy is a legal process whereby an individual’s outstanding debt is either reduced or eliminated under the protection and supervision of the court. If there are payments to be made to creditors, the schedule is drawn up under court supervision.
Making Informed Choices
Regardless of the choice, you make to eliminate your excessive debts, it is very helpful to have accurate information to make the right choice.
Always speak to a qualified professional to receive correct information on the action you intend to take. In some cases speaking to a lawyer may be beneficial. If you have general concerns about what your options are a certified credit counselor can be an excellent resource.
Make sure to choose a counseling agency that is licensed, accredited, and non-profit. Additionally, make sure the counselors giving you advice are certified as well. Once you receive accurate information and choices on your situation you can make an informed decision. In many cases deciding on a course of action based on accurate information can be a very liberating experience!
