Debt Relief Options in Illinois

Debt Relief Programs in Illinois

Illinois residents who are looking for help with debt can find it through banks, credit unions, online lenders and debt-relief companies (both nonprofit credit counseling agencies and for-profit companies).

The five major debt relief options are debt management programs, debt consolidation loans, nonprofit debt settlement, traditional for-profit debt settlement and bankruptcy. Each program has benefits and negatives, depending on the consumer’s financial situation.

Most options focus on eliminating credit card debt, but debt relief also can be used for other unsecured debt, like medical bills and personal loans.

Here is a look at debt consolidation programs in Illinois, with pros and cons of each option.

Debt Management

Debt management plans are a 3-5 year program that includes free credit counseling. The goal of debt management is to reduce the interest rate on your credit card debt to somewhere around 8%. In the process, it should lower your monthly payment and shorten the payoff period.

You make a fixed monthly payment to a nonprofit credit counseling agency, which distributes the payment to creditors in an agreed upon amount.

Many people with credit card debt have interest rates of 20%-25% or higher. A consumer who has $5,000 of credit card debt at 25% interest is paying approximately $105 of interest every month. If the rate is reduced to 8%, the interest paid is $33 a month. The $72 difference could be used to pay down the balance even more.

Credit score is not a factor in qualifying for a debt management plan. In fact, your credit score should improve as on-time payments are made and credit balances are reduced.  A debt management plan not a loan, so you can leave the program any time (though interest rates on credit cards that haven’t been paid off will increase).

» Where to find it? – Debt management plans are offered by nonprofit credit counseling agencies, certified by the National Foundation for Credit Counseling. They are fiduciaries, which means they’re required by law to act in clients’ best interest.

» Is it right for you? – Illinois consumers who have enough income to pay their bills, but have high credit card debt and need help lowering their monthly payments, as well as financial counseling to help with budgeting, would do well in a debt management program.

Debt Consolidation Loans

Debt consolidation loans are low-interest loans aimed at paying off high-interest debt, usually credit card debt. A consolidation loan. is one big loan used to pay off all debt for multiple cards.

You make one monthly payment to the bank/credit union instead of 3-4 credit card payments. The interest rate depends on your credit score and whether you are willing to put up collateral, like your home or car, to back the loan.

Typically, people put up collateral and pay around 10%-12% for a debt consolidation loan, compared to the 25% interest rate they likely are paying to credit card companies. This is a single payment to a single entity, at a lower interest rate that saves money and simplifies payments.

Some lenders pay creditors directly, others give the borrower the money and let them pay creditors at their discretion. The downside of DCLs is that you’re taking out a loan to pay off a loan.

» Where to find it? – Banks, credit unions and online lenders offer debt consolidation loans. If you already have a relationship with a bank or credit union, that would be the place to start. Be sure to shop around to get an interest rate that makes taking out a loan to pay off credit cards make sense.

» Is it right for you? – Consumers with a good credit score benefit the most – good credit means that they will likely get a loan with an interest rate low enough to make it worthwhile. Borrowers who have the restraint to not build up more credit card debt after taking out the loan will also benefit.

Nonprofit Debt Settlement

Nonprofit debt settlement, also known as nonprofit credit card forgiveness, is a new option. The consumer pays 50-60% of the balance on credit cards over 36 months, with the rest forgiven when the program ends.

The forgiven debt, if it’s more than $600, will be taxed, since the IRS considers it income.

The upside of nonprofit debt settlement, is there is no negotiating. Lenders agree ahead of time to how much needs to be paid off. The downside is that to qualify, you can’t have made a payment on your credit card debt for more than 180 days.

» Where to find it? – This program  is only one year old and is offered by a small number of nonprofit credit counseling agencies certified by the NFCC.

» Is it right for you? – Consumers who have overwhelming credit card debt that they haven’t paid on in more than six months are the best candidates. The programs have strict requirements. Your account must be more than 180 days past due; you must have more than $1,000 in qualifying credit card debt and creditors must be on the list of participating creditors.

For-Profit Debt Settlement

Traditional for-profit companies pay creditors in one lump sum and claim the amount paid is 50%of what the borrower originally owed.

Unlike nonprofit debt settlement, the company and creditors do not have prior agreements. The consumer makes monthly payments into an escrow account while negotiations over a settlement amount take place. Once the creditors are paid, the borrower also pays fees to the settlement company.

Traditional debt settlement stays on a credit report for seven years, and the IRS taxes the forgiven balance.

» Where to find it? – Debt settlement/debt consolidation companies, often found online offer this program.

» Is it right for you? – Consumers who owe a large amount on a credit card and want to avoid bankruptcy, may find this is a solution that works for them. Also, consumers who are savvy and can do the research to make sure it won’t cost money, rather than saving money.

Bankruptcy

Bankruptcy should be the last option people consider to get out of debt. There are two types of bankruptcy for consumers.

Chapter 7 bankruptcy is the most common form of bankruptcy. In 2021, 70% of Illinois residents who filed bankruptcy, filed Chapter 7. It uses the individual’s non-exempt assets to pay off unsecured debt. What can’t be paid off is forgiven.

Fortunately, the list of exempt assets includes your home (unless you have a lot of equity in it), your car, clothes, things you need for work, pension and Social Security funds.

Chapter 13 bankruptcy is for people who have enough income to make monthly payments on current bills, and to catch up on unpaid debt. The court restructures the debt and sets up a 3-5 year payment plan. Unsecured debt left after the plan is complete, is forgiven. Chapter 13 bankruptcy is successful less than half the time.

» Consequences of bankruptcy – A bankruptcy stays on your credit report for 7-10 years, and can make it difficult to get a car loan, buy a house, or even rent an apartment or get a job. If someone who files Chapter 13 doesn’t complete the plan, they’re back to square one with their debt.

» Is it right for you? – Chapter 7 bankruptcy usually takes six months or less, and most unsecured debt is discharged. Very few people lose any of their assets in Chapter 7 proceedings.

With Chapter 13, someone who can stick with the plan can get out of debt without losing their assets. With both, bankruptcy automatically stops a foreclosure proceeding while the court considers the bankruptcy case, and can also discharge lawsuits from creditors.

At what point should this be regarded as your best option? If you are facing foreclosure with no chance of getting out of it, or lawsuits from creditors, then bankruptcy is likely the best option.

Statute of Limitations in Illinois

Illinois statute of limitations on “unwritten debt,” which includes credit cards, is five years. Written debt – a loan or contract to buy something – is 10 years; secured debt, like an auto loan, is four years.

The statute of limitations is the window for a creditor to take a debtor to court to force them to pay. The clock starts on Illinois statute of limitations when the last payment is made.

In Illinois, once the statute of limitations has expired, debt collectors may still contact you, but they can’t take you to court, or threaten to take you to court.

The statute of limitations applies to the states the debtor lives in, not the one the creditor is headquartered in. So, if an Illinois resident defaults on a credit card issues by a company in California, it’s the Illinois statute of limitations that applies.

Debt Collection Laws in Illinois

Every state must follow the Fair Debt Collections Practices Act. It sets rules on how debt collectors can communicate with people who owe money. But states are also allowed to go beyond what the law allows to protect consumers, and Illinois has stronger debt collection laws that protect state residents.

While federal law allows wage garnishment of up to 25% of disposable income (garnishment is when a creditor gets a court judgment to take money directly from your paycheck), in Illinois, the limit is 15%. Those who make less in a week than the equivalent of the state minimum wage for 40 hours also are protected from garnishment.

The state also recently made “payday loans” – loans with crippling interest rates – illegal. The cap on interest on a loan in Illinois is 36%.

More Debt Statistics in Illinois

Illinois residents do a little better than the rest of the country at accumulating debt, with an average debt balance of $50,450 for residents with credit reports. The national average is $55,810.

On the other hand, Illinois was ranked 16th in the nation in 2021 for per-capita bankruptcy filings.

Other Illinois consumer debt statistics:

• Average mortgage debt: $34,500
• Average credit card debt: $3,080
• Average student loan debt: $6,120
• Overall debt payments 90 days delinquent: 1.99%
• Number of Illinois resident filing for bankruptcy in 2021: 20,343