Debt Relief Options in New Jersey

Debt Relief Programs in New Jersey

New Jersey residents struggling with credit card debt have a choice of debt relief options. Credit counseling agencies (nonprofit and for-profit), banks, credit unions, online lenders and debt settlement companies all work with consumers who are trying to pay off credit card debt.

Approaches by debt relief companies differ, and New Jersey residents should take their financial situation into account when considered the pros and cons. The five debt-relief programs offered are debt management programs, debt consolidation loans, debt settlement, nonprofit debt settlement and bankruptcy.

Here is an outline for each program and why it might work for you:

Debt Management

Debt management programs can cut the interest rate on credit card debt in half or more. DMPs reduce interest to around 8%, and the average interest rate on credit cards is 16.7% (in March 2022). The plans allow you to make one fixed monthly payment to a nonprofit credit counseling agency, and the agency pays your creditors. One caution though, is that if you miss a payment, the interest can jump to 20-25%, and if you miss two payments it can go as high as 25-30%.

A lower interest rate can result in a big savings. For instance, if you owe $5,000 on credit cards with an interest rate of 8% instead of 25%, your monthly payment is $228 less, $105 a month instead of $33. Lower interest, as well as one fixed monthly payment, are the top reasons a debt management program is a great option. Counselors at nonprofit credit counseling agencies review your finances with you, factoring income and expenses to calculate the monthly payment to eliminate your credit card debt.

Your credit score is not a factor for enrolling. You can be debt-free in 3-5 years if you make on-time monthly payments, and you may even pay the debt off early. If you don’t like the program, you can quit, though that means the credit card company will increase your interest rates, and you’ll be back to paying 20-30% interest.

» Where to find it? – Debt management plans are offered by nonprofit credit counseling agencies, who work with creditors to reduce interest rates. The program covers unsecured debts, like credit cards, but not secured debts, like houses or cars.

» Is this right for you? – New Jersey residents with high-interest credit card debt would find this a great option, since it lowers the interest on multiple credit cards and combines them into a fixed monthly payment that takes 3-5 years to complete..

Debt Consolidation Loans

A debt consolidation loan is used to pay off debt for multiple high-interest credit cards. You make one monthly payment to the lender instead of making multiple credit card payments. The interest rate of the debt loan depends on your credit score and whether you are willing to put up collateral, like your home or car, to back it. The better your credit score, the lower the interest will be.

Typically, people put up collateral and pay around 10-12% interest for a debt consolidation loan, compared to the up to 25% interest they are paying to credit card companies. Making one fixed payment, at lower interest, to a lender results in big savings, and also makes it easier to pay. This can be a great debt-relief option for some borrowers. The higher your credit score, the more likely you are to qualify and to get a good interest rate.

On the other hand, you will have the same amount of debt – that is, if you stop using your credit cards. You’ll have even more debt if keep charging on cards after taking out the loan. In that case, you’ll have the monthly loan payments as well as escalating credit card payments.

» Where to find it? – Banks, credit unions and online lenders offer debt consolidation loans. It’s a competitive market, so shop around for the lowest interest rate and repayment terms.

» Is this right for you? – Borrowers with a good credit score (670 or higher) and the discipline to stop using credit cards will find a debt consolidation loan a good option. Generally, consolidation loans come with lower interest rates than what credit card companies charge.

Debt Settlement

Debt settlement allows a consumer to pay off a debt for less than what is owed. You make one payment to the debt settlement company after making payments, sometimes for two or three years, that go into an escrow account. The company negotiates with your creditors, and when the escrow amount reaches the settlement amount, the companies pays your creditors.

While it may sound like a good deal, there are a lot of pitfalls. You stop paying the credit card companies, which means late fee penalties and interest are added to what’s owed. Card companies do not like this form of debt relief and some refuse to deal with debt settlement companies, so they can’t always negotiate a lower payment for you.

While debt settlement companies like to brag that they can cut your credit card debt in half, that amount doesn’t include their fees, late payment penalties and interest on the accounts.
The benefit to the credit card company is that it gets some of the money it’s owed, as  opposed to little or nothing if you default.

It can be a long process, and it stays on your credit report for seven years. Also, the IRS considers forgiven debt of more than $600 as income that must be declared on your tax return.

» Where to find it? – For-profit debt settlement is offered by companies that specialize in this service. The process usually takes 2-3 years and card companies are under no obligation to accept settlement offers.

» Is this right for you? – Anyone with a large amount of debt who is trying to avoid bankruptcy. With two million Americans owing $50,000 in credit card debt, getting it knocked down to $25,000 isn’t a bad deal (though remember, that $25,000 will be taxed as income).

Nonprofit Debt Settlement

Nonprofit debt settlement, created in 2021 by nonprofit credit counseling agencies, is similar in one way to for-profit debt settlement – it pays 50%-60% of your credit card balances, with the rest forgiven. But that’s where the similarities end. Lenders already have agreements with the companies, so there is no long negotiation period. Consumers must have not made a credit card payment in 180 days; must make fixed 0% interest payments for 36 months and all payments must be made on time or the nonprofit cancels the program. Those in the program can pay off early, but they can’t get an extension. The forgiven balance is considered income, and will be taxed by the IRS.

» Where to find it? – The program started in 2021, so only a few nonprofit credit counseling agencies offer it and only a few credit card companies and banks participate. Nonprofit credit counseling agencies are certified and accredited by the National Foundation for Credit Counseling. Federal law requires the agency act in the client’s best interest. Search online for “nonprofit debt settlement” to find an agency that will provide this program.

» Is this right for you? – Consumers who face overwhelming credit card bills but don’t have the income to pay them off are the best candidates for nonprofit debt settlement.

Bankruptcy

Bankruptcy, though a big step, may be the best solution available for some New Jersey residents. It gives you a chance to get your finances in order, and in most cases you can keep your home, your car and other necessary possessions.

There are two major types of bankruptcy, Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, non-exempt assets are sold by a trustee appointed by the court and the money is used to pay off unsecured debt. Exempt assets include those necessary to you living and working, including your home, car, Social Security benefits and items you need for work.

In Chapter 13 bankruptcy, you keep your assets, and your debt is restructured by the court. You make payments on the debt, as well as keep up with monthly payments. Chapter 13 usually takes 3-5 years to complete and any unsecured debt left at the end is discharged.

There is a price to pay for bankruptcy, though. It will decrease your credit score by 100-200 points, and stay on your credit report for 7-10 years, making it more difficult to get credit for a home or car loan during that time.

» Where to find it? – If you plan to file for bankruptcy, your first call should be to a bankruptcy attorney. Attorneys who deal in bankruptcy know how to navigate the system, and will protect you and your family as much as possible in the process.

» Is this right for you? – If there’s no possible way to pay off your debt in five years, given your income, bankruptcy might be your best debt-relief option. Before taking the plunge, try nonprofit counseling, settlement or consolidation, because they have less severe results.

Statute of Limitations in New Jersey

The statute of limitations on credit card debt and most other debt in New Jersey is six years (it’s four years for auto loans). That means that the debt collector has that amount of time to file a lawsuit. The clock on the statute of limitations in New Jersey starts with the last interaction with the creditor; if you make contact with the debt collector, it resets the clock. If the statute of limitations has expired, they can still pursue you for the debt, they just can’t take you to court. If a debt collector sues after the statute of limitations has expired, it’s up to you to go to court and have the case dismissed on those grounds.

Debt Collection Laws in New Jersey

New Jersey consumers, like those in all states, are protected by the Federal Debt Collection Fair Practices Act. The law has restrictions for when and how debt collectors can contact consumers, and also has protections against deception and harassment by creditors.

New Jersey has stricter protections for wage garnishment – which is called wage execution or wage attachment in the state – than the federal minimum. In New Jersey, a creditor can only garnish up to 10% of a consumer’s disposable income if they earn less than 250% of the federal poverty level for their family size; and only up to 25% if they’re above the federal level.

New Jersey doesn’t have a law regarding payday loans – high-interest loans designed to be paid back quickly – but it does have a 30% interest cap on personal loans of less than $50,000. Consumers should be aware, though, that online payday lenders find ways around such interest caps, and to understand how fees and high interest will work.

More Debt Statistics in New Jersey

New Jersey is an expensive state to live in – everything costs more than the national average, including houses, cars and general goods. The federal Bureau of Economic Analysis in 2021 rated it the third-most expensive state or territory in the U.S. on its Real Personal Consumption Chart.

• Total Debt Balance: New Jersey residents had a total debt balance of $62,090 by the end of 2021, well above the national average of $55,810.
• Bankruptcies filed in 2021: 9,097 New Jersey residents filed for bankruptcy in 2021, 1.15 for every 1,000 residents, ranking it 27th for per-capita bankruptcies.
• Average monthly mortgage payment: New Jersey residents pay an average $2,413 a month towards their mortgage, the fourth highest rate in the country after Hawaii, Washington, D.C. and California.
• Average balance owed on auto loan: $4,345
• Median income: The median income in New Jersey is $82,545, well above the national average ($67,521) in 2020.