When considering bankruptcy and other options to deal with your debts, I refer to a quote from Professor Elizabeth Warren of Harvard Law School from her book All Your Worth:
- “You can’t borrow your way out of debt.”
People in debt are flooded with information that tells them that they should NOT file bankruptcy and they are told to find the answer to their debt problems by refinancing, getting a new card to consolidate, transferring balances, borrowing from friends/family, or trying a debt management program through a credit counselor.
The only way to get out of debt is to either take the debt on systematically and pay it off or settle it, or file for bankruptcy.
Paying it off is the right choice for some people if they make more than they need to live on, and make enough to use the rest to pay enough towards the balances and to eventually pay them off in full.
If people need to borrow or use credit cards to pay their living expenses while they pay off other debts, all they are doing is moving debt around.
A reputable credit counselor who works with the client to review the entire financial situation can be a great help. The sign of a good counselor is one who will look at the client’s income, and all the expenses they encounter month to month, year to year, including planning for things that don’t come up all the time such as new tires and car repair, medical issues or house/appliance repairs.
You want to look for a counselor who will work with you to not only set up a plan that will work on paper, but will follow through with the client to make sure that the numbers set up are realistic and the debtor can live with it.
No debt management plan will succeed if it isn’t set up in an amount that the debtor can really pay. Â If the counselor starts with what it will take to make the debt payments, but ignores a solid budget that covers what it really takes to pay for the client’s life, the program is more likely to fail.
Unfortunately, the payments on the debts are where many of the debt management programs begin and they don’t look down the road to be sure that the clients will be in a program they can make it through all the payments.
Of course, no one can predict the future and sometimes people who rightfully appear to be good candidates for payment plans find that they can’t complete them.
What many people don’t realize is that Chapter 13 bankruptcy is very similar to debt management programs and is able to help people pay their debts to their creditors, but it isn’t voluntary on the part of the creditors, can be for a reduced amount if the debtor is paying what they can, and can also be lowered if things get worse.
The positive side of debt management programs are:
- It isn’t bankruptcy.
- If you get a good counselor, you get someone to work with and help you along the way. [You want a counselor who works with you during the entire program, not just one who sets you up in a payment plan and sends you off to do it by yourself.]
- You pay off debts that you owe.
- It may help lessen or stop creditor calls while you attempt to do it.
Some downsides to debt management programs are:
- They are voluntary on the part of the creditors so they don’t have to participate.
- Creditors are free to charge high interest rates or sue. There is no requirement or obligation by creditors to work with you, or that they can’t sue you while you are attempting a non-bankruptcy payment plan.
- They have a negative affect on your credit rating.
- They are only as good as the counselor that the debtor is working with, and unfortunately there are many bad ones with little to no recourse against them if they don’t do a good job.
