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Debt Settlement

Debt settlement works best if you have unsecured debt. This is debt (like credit card debt) that doesn't have collateral attached. A mortgage is secured by a home, and an auto loan is secured by a car. If you default on these types of loans, the lender can repossess your property. With unsecured debt, the ability to take your property is very limited.

Those who have at least $7,500 in unsecured debt, and who have trouble making minimum payments, can potentially benefit from debt settlement. The entire premise of debt settlement is based on the consumer's inability to pay the debt in full.

How Debt Settlement Works

Debt settlement works by requiring you to stop making your payments to your creditors. Instead of making your payments, you negotiate a lower lump sum payment. Often, you can settle for between 40 and 80 cents for each dollar that you owe. If your creditors feel that you won't be able to pay the debt, they are more willing to accept a smaller amount so that they can get something.

In New Jersey, many consumers find it helpful to work with a licensed "debt adjuster" or attorney who can represent them. Instead of paying monthly credit bills, you set money aside in an account. The money accrues until a credit accepts a settlement offer. Then the money in the account can be used to discharge the debt.

While you can settle your debts on your own, it can be an overwhelming process. The help of a knowledgeable and reputable third-party can manage the situation, and offer proper incentive to creditors so that they accept your settlement.

Carefully consider your options, however. In New Jersey, a special license is required to become a "debt adjustor." Many of the for-profit companies that run debt settlement programs from out of state are not properly licensed in New Jersey. There are some exceptions to the debt adjuster rule, but it's best to start with the approved New Jersey debt adjusters, or speak with an attorney who can help you.

Risks of Debt Settlement

It's important to understand the risks associated with debt settlement. Since you will stop your credit payments, your credit score will suffer. Additionally, a debt listed as "settled" on your credit report has a greater negative impact than a debt that you pay off in full. Finally, there is always the risk that the creditor will decide to sue you for nonpayment of the debt, rather than settle with you.

Once you understand these risks, you can proceed with your debt settlement.

Credit Counseling

A qualified credit counseling professional in New Jersey helps consumers explore their options when they feel as though their debt is out of control. A credit counselor can provide you with insight into your spending behaviors, as well as help you create a plan for paying off debt. Additionally, credit counseling agencies often understand the law, and can help you identify when creditors or debt collectors are violating laws, such as New Jersey's Consumer Credit Fairness Act, designed to protect consumers from unfair practices.

How to Choose a Credit Counselor

If you feel as though you can't handle your debt on your own, getting credit counseling can help. In New Jersey, there are a number of governmental and nonprofit organizations that exist to help consumers get their credit under control. This list of approved credit counseling agencies in New Jersey is a good place to start. It's also possible to find credit counselors approved by the federal government.

Most reputable credit counseling agencies will hold an initial consultation with you for free. Meet with two or three credit counselors to find out their process, and what they can do to help you. Some credit counselors just take your situation and help you work out a plan for taking care of your debt or help establish a debt management plan -- a formal arrangement in which you pay the credit counseling agency a set amount each month and the agency pays your creditors.

Before you choose a credit counseling agency, make sure you get all of the terms in writing, and that you understand exactly what the counselor can help you with. Be wary of credit counseling agencies that require large up front payments. Learn more about how credit counseling should work from the National Foundation for Credit Counseling.

In many cases, credit counseling can provide a fresh outside perspective on your credit problems. Knowledgeable credit counselors can look at your financial situation, and help you create a plan to get out of debt. They can also help you negotiate lower interest rates or payments in some instances, and keep you on track as you get your financial life back in order.