1. Myth: Debt-management programs, credit counseling -- it's all the same thing.
Fact: Credit counselors are just that: people who counsel consumers on how to develop a budget and stick with it to make regular payments and pay off their debts. In a way, they are educators. On the other hand, debt-management programs (DMPs) are simply a tool in the credit counselors' toolbox. The typical DMP involves you paying a monthly amount which is then distributed to your creditors until the debts are paid off. Then the account is closed.
2. Myth: Debt settlement is the cheapest way to go.
Fact: If a you are approached about enrolling in a "debt-settlement program," resist the temptation. Usually what this means is that the agency takes your money, sits on it until the creditors give up on the collection calls. Then the agency offers to settle for pennies on the dollar. Among other things, this will hurt your credit very badly because the dunning calls go against your credit score, not the agency's record. Lastly, there may be tax implications in the getting the write-off that the creditor grants you.
3. Myth: Some agencies can negotiate lower DMP payments than others.
Fact: A majority of creditors have pre-set, existing programs that 95 percent of individuals are placed. The value of the DMP counselor is knowing what to ask for -- and then making all the phone calls and paperwork for you.
4. Myth: You need a formal program to get out of debt.
Fact: Most creditors will grant you the same breaks that the credit counselor would get -- if you know what to ask for. See #2.
5. Myth: always saves you money.
Fact: It really depends on the interest rates you get, the term of the restructuring, and how much you can afford to pay per month. Sometimes you can lower your payments but you might pay far longer into the future. Better get your calculator out to see if the details work for you or against you. Deciding on is a simple formula. Compare your existing minimum payments to what your payments will be for that same debt under the debt management program. If you don't save 5 percent to 10, at least, it's probably not for you.
6. Myth: DMPs help your credit rating.
Fact: That depends on what your credit score looks like before you enroll in the DMP. If your score is high, if you've managed to pay your bills on time to this point, then the DMP might actually hurt your credit standing. Better you should get a home equity loan instead. On the other hand, if your credit score is low, credit counseling won't make it worse. In fact, in many situations, a DMP can make a positive difference.
7. Myth: Bankruptcy will ruin your life.
Fact: It depends on your past history. If you are on a fixed income and you have already spent years borrowing from every friend and relative just to make ends meet, then it may be your only alternative.
8. Myth: Bankruptcy is no big deal.
Fact: Many people bail out via bankruptcy for the most ridiculously small amounts of debt. The downside is that the damage to their credit score will last far, far longer than any temporary relief they get right now. Bottom line: bankruptcy is an extreme solution. It's for people on a low fixed income where the amount of debt is equal to 2-3 times their wages.
If you file Chapter 7 -- release of all debts -- it will stay on your record for nearly 10 years. If you file Chapter 13 bankruptcy -- where you reorganize your debt -- you have seven years after you pay off the last of the debt. So if you need another five years to get back on your feet, you're looking at being suspect for 12 years. That's a long time.
And another thing:
More and more, employers are looking at credit reports. Sometimes they even decline to hire someone based on what they find. If this isn't bad enough, it also means that you might not be able to get health insurance! And don't even think about lying about it on the application -- you can be held accountable for that at a later date.
Conclusion
There are no easy shortcuts to managing your debt. Only you can decide to do it and go through with it all the way to the finish. It can take years, but it is worth it. So start today.
