Many people believe that it’s the low-income consumers who most struggle with debt. While it might be true that this segment of the population has a hard time paying back what they’ve borrowed, they’re not the only ones who seek help from debt relief companies. The number of middle-income consumers seeking debt relief is on the rise, at least with one debt relief agency.
According to the New York Times, CredAbility, an Atlanta-based credit counseling agency, saw a 26% increase in the average income of debtors seeking debt help from 2007 to 2011. However, there was only a 9% increase in the amount of credit card debt from those borrowers. In other words, people with higher incomes are looking for help with roughly the same amount of debt. This tells us that more money doesn’t necessarily mean it’s easier to pay back debt.
It would seem that a household with $54,000 annual income – the average income of consumers who sought help from CredAbility – would have the means to pay back their credit card debt without help. The NYTimes article suggests that the inability to borrow against home equity and slowness to scale back their lifestyle are a couple of reasons that middle-income borrowers seek debt relief.
With credit counseling, debtors are placed on a debt management plan that requires them to make a single monthly payment to the credit counseling agency. The agency then divides the payments and sends them to the appropriate creditors. The credit counseling agency is often able to negotiate a lower interest rate and minimum payment that typically makes the total payment on a debt management plan more affordable.
Credit counseling isn’t the only option available for families struggling to pay their credit card balances. Debt consolidation is another option that’s similar to a debt management plan in the sense that you have one lump-sum payment that goes toward all your debt. The major difference is that debt consolidation combines all your debts by paying them with a lump-sum loan. Several years ago, home equity loans and second mortgages were a popular way to consolidate debt. However, as the NYTimes article notes, borrowing against home equity isn’t as viable as it once was.
Still another option for middle-income borrowers to handle their debts is debt settlement. Through debt settlement, you repay a percentage of your outstanding debt and the creditor agrees to cancel the remaining debt. Some creditors may automatically offer settlement if you’re past due on your account. Otherwise, it’s up to you to negotiate a settlement or hire a debt settlement company to do the work for you.
Before seeking help from a debt relief company, consumers could try to pay off debt on their own. That typically means making major sacrifices so that more income can go towards the debt. For example, you may have to eat out less, take your lunch to work, wear your clothes longer, or eliminate premium cable services. Evaluate your spending and look for expenses that you can cut out. Once you’ve repaid your debt, you can consider adding these back.