A family member has $50,000 in credit card debt; they can refinance into a HELOC or cash-out, but they are concerned that the debt will be attached to the home if they are unable to make payments.
Why is everyone talking about this “debt management plan”? Furthermore, how is it computed? Does it affect the assets you currently own? How is credit score affected by it?
I wouldn’t convert unsecured debt into debt that is house-secured.
Depending on income and financial capacity, I would advise bankruptcy or debt consolidation/negotiation. That way, they won’t lose the house.
The problem is that a court ruling can quickly turn unsecured debt into secured debt. And losing one’s home is a guaranteed outcome of any bankruptcy (along with a host of other losses).
That is soooo not true
A debt management plan involves working with one of two federally approved non-profit organizations, either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). These organizations assess your debts and income to determine the best strategy, including negotiating lower interest rates to help you pay off the principal faster. You remain responsible for paying the full debt, and some creditors, like Chase, may only negotiate through these companies. Fees typically range from $5-$10 per account managed, plus a one-time setup fee of around $50. These organizations can be beneficial if you need help managing your finances.
Importantly, they do not place liens on your property, such as a car or house. Consulting with them doesn’t obligate you to follow their plan, and under the Credit Repair Organizations Act, you can cancel within three days without penalty.
However, there are downsides. Your credit score will likely drop, though the extent is unclear. You also can’t use the credit cards included in the program for new purchases, meaning large expenses like new tires must come from savings or other sources. It’s unclear whether you can apply for a new credit card, but a secured card might be an option. It’s advisable to keep one card separate from the debt management plan for emergencies.
Debt settlement, where part of your debt is forgiven, is another option, but it comes with risks. Forgiven debt may be taxed as income, potentially increasing your tax bill. It can also expose you to lawsuits and high fees. For more details, visit: https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-credit-counseling-and-debt-settlement-debt-consolidation-or-credit-repair-en-1449/.
With a DMP, your unsecured credit cards and loans will be closed, interest rates and payment amounts will be lowered, late fees will be removed, and an automatic monthly payment schedule will be set up that will be sent to each of your creditors once a month. Closing accounts might lower your credit because it affects your debt to credit ratio. As long as you make all of the payments, there is no attachment to any assets and the obligations will be settled in three to five years. I would strongly advise calling the one that looks good to you. They will provide a free consultation during which they will evaluate the circumstances and go over your alternatives. They’ll then provide a low-cost DMP if you qualify. As a credit counselor, I am.
Realistically, I’ll also pay about 40% of it to support her and put an end to it; at a low enough rate, this can be completed in a year.