Text size:

Decoding debt-speak

By Lauren Johnston | amNY.com

June 19, 2007

The debt burden comes with its very own dialect. Words like consolidation, settlement and DMP are the anchors of debt-speak, but what do they mean? How do they work? Who are they for?

Sandy Shore, a veteran credit counselor who's worked with dozens of debt-leaden young professionals in the metro area, spoke to amNewYork to decode and define the terms.

Debt Management Plan (DMP)/Credit Counseling
How it works: This is a program put together by a credit counseling agency. The agency negotiates with creditors to freeze or lower interest rates, finance fees and other charges. You give the agency a bulk amount each month to be distributed among all creditors.

Who it's for: Shore says this plan works best for people with large amounts of unsecured debt (i.e. steep credit card balances -- usually not student or personal loans) who are struggling with high interest rates resulting from late payments.
Shore's words of wisdom: "A DMP alone is not a solution; it's part of a solution. You also have to cut expenses."

Debt Consolidation
How it works: In this type of plan, one big loan is used to pay off several other debts. A "consolidation loan" simplifies payments so instead of four or five bills, you pay only one per month, which is likely to have a lower interest rate than the credit cards.
Who it's for: Shore says be wary. You haven't paid anything off; you've exchanged one debt for another that may have hidden pitfalls like collateral in the form of property. "I rarely recommend it and almost never for young people," Shore said. "It might work for older people with a lot of equity."
Shore's words of wisdom: "A lot of consolidation ads make it sound like credit counseling, but it's often a loan and mostly it's a bad idea. A lot of people are using their houses as a piggy bank these days."

Debt Settlement
How it works: This is a deal to pay creditors less than the full amount owed. Usually a settlement agency advises clients to stop paying bills while reps work to negotiate a lower payment i.e., you owe $8,000, they ask the creditor if you can pay $4,000 and call it even. And they charge a fee.
Who it's for: Shore says no one. "I would never recommend this. It's not for a young person because it damages credit and could take years," she said. Basically you haven't paid bills for at least a year and that equals a negative credit report. Bills will be recorded as "settled" versus paid and the negative information sticks around for 5 to 7 years.
Shore's words of wisdom: "Settlement is legal, but it's probably the worst thing you can do. Your credit is shot and whatever amount you don't pay is taxable income. They don't tell you this."

Bankruptcy
What is it: Your debt is so high that no matter how much you cut costs or sell assets there's no way to make a reasonable dent, so the next step is filing for Chapter 7 or 13.
Who it's for: Bankruptcy laws changed in 2005, and now it's a lot tougher to file. Chapter 7 (liquidation) was the more common form of but filers must now meet a low median income requirement, be up-to-date on federal taxes and undergo credit counseling before getting the OK to wipe out debts. The new law is also tough on attorneys, so finding a bankruptcy lawyer may be more difficult.
For more info, go to: http://www.ftc.gov/bcp/conline/pubs/credit/kneedeep.shtm
Shore's words of wisdom: Shore warns parents to resist the urge to provide financial cushions to young people with financial woes it doesn't help them learn to budget and, "some people give money to their kids and end up in trouble themselves."