Debt management: For those dizzy with debt

Dear Debt Adviser,
Please help me decide which option to take — debt management or debt settlement. I have two mortgages and my car loan is stable. With the consequences of my credit score being ruined with either option, I still need to do one of them. Please advise. Thanks.
— Lou

Dear Lou,
Good for you! Not only are you determined to take action on your debt problem, but you also are looking carefully before you take a leap into a solution. Your best option for taking care of your debt will depend upon how much income you have available after expenses to satisfy your debts. Any solution will need to be acceptable to you and your creditors. Creditors typically have a minimum amount they will accept either for debt settlement or in a debt management plan. If you can’t come up with the minimum, then you may have to look into more severe and damaging options. Let’s get started.

My recommendation is to begin by contacting a qualified credit counselor at or These nonprofit credit counseling agencies will provide you with a thorough review of your finances. After the financial review, your counselor should give you a budget detailing your expenses and what you can afford to pay each month toward your debts. They will also give you a written action plan with alternatives. This should be free of charge. Options may include whether you would qualify for and benefit from a debt management program or if you would be better off following a different action plan.

If you have enough income to afford to repay your creditors in a debt management plan but not enough to handle repayment on your own, this may be the best option for your credit. Your accounts will be noted as being part of a debt management plan in the description section of your credit report. This does not count against you when calculating your credit score. Lenders report accounts involved in a debt management plan in a wide variety of ways. Some report it negatively; some bring you to a current “good” status faster with a debt management plan to encourage your participation. Ask how your creditors will report to the bureaus.

Should you not have enough income or decide you don’t want to pay what you owe through a debt management plan, I suggest you consider seeing an attorney. Armed with your budget from the credit counseling agency, you can discuss legal options with a lawyer. I advise consumers to consider bankruptcy only after all other options have been explored. The main reason is that a Chapter 7 bankruptcy, although sometimes necessary, will negatively affect your credit the most and stays on your credit report for 10 years. A Chapter 13 bankruptcy is very much like a debt management plan but considerably more onerous to you and your creditors. Your attorney can discuss debt settlement, bankruptcy and other options with you such as legal challenges for debts beyond the statute of limitations and more.

My experience is that not everyone sees things as I do. So if you want to check out a debt settlement company and make your own decision, I suggest you begin at the Federal Trade Commission’s site. Additionally, the Association of Settlement Companies and its members are trying to establish standards for debt settlement firms. Avoid companies that charge a large upfront fee, and check your local Better Business Bureau to see if the debt settlement company is in good standing. Be sure you read and understand all the terms of any agreement before you sign anything, and be leery of any company that is not willing to answer any and all questions concerning the agreement.

A last word on your credit score. I suggest that you focus on resolving your debt problem in the way that is best for you. Your credit score should be a secondary consideration. Credit can be rebuilt once you have this behind you and are on a firm financial footing

Good luck!

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