When you’re overwhelmed by surmounting debt payments each month, you may begin to wonder about alternative ways to eradicate these financial burdens. There’s no automatic cure-all, but there are a few ways you can work with creditors to reduce the amount you pay by negotiating or setting your accounts.
Some tactics are straightforward and can be handled on your own, while others are more extreme and may require professional assistance. It’s also important to recognize the short-term and long-term impact each of these options can have on your life. Many negatively impact your credit for years and can also limit your access to new credit.
Explore each of these debt relief strategies to find the one that best suits your individual situation. When you discover the right fit, you can then start to turn over a new leaf in your financial life.
When to Consider a Debt Relief Plan
Even if it takes you a long time, consistently making payments on your existing debt without accruing any new balances is an ideal way to handle your situation. But this isn’t always possible, especially if you’ve had major setbacks in terms of work, medical issues, or some other financial catastrophe.
So when should you start to consider a debt relief plan?
Some plans like debt consolidation can be good for anyone, even if you’re not feeling strapped by your monthly payments. These options usually don’t impact your credit score for the worse and you can actually come out saving interest in some situations.
Other options like debt settlement or bankruptcy require much more consideration. If you’re thinking about one of these choices, you should really feel confident that you can’t otherwise pay off your unsecured debt over the next few years. Make sure you do your best to drastically cut your spending and find alternative ways to bring in income if at all possible.
Once you’ve exhausted all of your resources for saving and earning and you still can’t meet your payments each month, then it’s time to consider more drastic debt relief options.
Get Professional Help
The good news is that you don’t have to make this decision without any professional advice. Many debt relief programs either require or recommend meeting with a non-profit credit counseling agency before enrolling.
This resource is either free or low-cost and can help you evaluate your financial situation with a trained, independent counselor who can help you weigh your options. Ultimately, the final decision is yours. But that doesn’t mean you can’t get some help along the way to ensure you make the best choice.
4 Common Debt Relief Options
Ready to solve your debt problems once and for all? Here are a range of options to consider no matter what your situation is today.
1. Debt Consolidation
Debt consolidation is a single term that actually applies to a couple different strategies when it comes to finding relief. In general, it means taking multiple account balances, paying them off with a single financial tool, then making payments on one account each month.
How to Consolidate Debt with a Credit Card
You can consolidate multiple credit cards by transferring your balance to one card. You typically start by choosing a card that has a low-interest rate. It can be one you already have or you can apply for a new credit card with a low promotional rate. The plus side is that you can save money if you’re able to pay off all of your balance during that period.
The downside is that most credit cards come with a balance transfer fee, which can add to your overall principal owed. Another negative is that you can incur penalty APRs if you’re late on a payment. This option is best for people with manageable, high-interest debt with a set strategy in mind for paying off credit card balances.
How to Consolidate Debt With a Personal Loan
It’s also possible to consolidate multiple types of debt with a personal loan. This is ideal for both credit card balances and other types of debt because you can pay off the outstanding accounts with cash from the loan rather than charging them to another credit card. Some lenders issue the funds directly to you to pay your creditors, while others directly distribute the funds to the creditors themselves.
2. Debt Management
A debt management plan allows you to enroll in a program to pay off unsecured debt over a period of three to five years. You’ll have a debt manager assigned to your account, who contacts your creditors to negotiate a payment plan. In some cases, you may be able to receive a reduced interest rate or other concessions like late fee removal to help reduce the overall burden of your debt.
Rather than paying your creditors directly, you’ll make one monthly payment to the debt management company. They, in turn, pay your creditors and you can view your progress regularly to see your balances decrease.
There is a price for this service, which is typically charged monthly and taken out of your payment. Usually, there is a separate fee for each account you have under the plan. You may also pay a one-time enrollment fee. Ideally, all of these costs should still cost less than paying your debt on your own.
What are the disadvantages of a debt management plan?
For starters, you can’t use any of your credit cards while making payments. Since it typically takes a few years to go through the program, this can be a major lifestyle change for many people. You might also incur penalties or have your plan completely canceled if you even miss a single payment, so be diligent in paying on time each month,
3. Debt Settlement
Debt settlement is a risky option because you essentially stop making payments on your accounts while the company negotiates with your creditors on your behalf. While that’s going on, you start to make payments into an escrow account. Once you reach a certain amount, that money is used to pay off your debts.
While all this is going on, however, your creditors will likely charge late fees, report late payments to the credit bureaus, and ultimately send your accounts to collections. In a worst-case scenario, you could even have legal action taken against you for these delinquent accounts.
Why even attempt to choose debt settlement?
If successful, you could potentially have your debts settled for much less than you originally owed. However, the debt settlement company will charge you a fee, usually a percentage of your debts. Definitely expect your credit to be damaged significantly after this process. Not only do all those late payments and collections appear on your credit report, but settled accounts are also listed and seen as a red flag to future creditors.
4. Bankruptcy
A final option for debt relief is bankruptcy, although just like debt settlement, it should be approached with caution. The two most common types of personal bankruptcy are Chapter 7 and Chapter 13. With Chapter 7, you can erase most of your unsecured debt in under a year; however, you’ll need to sell many of your personal assets in order to settle with your creditors. In some cases, you may be able to keep your home and car, although this varies depending on your individual circumstances. You’ll also need to meet certain income requirements based on your family size and the median income of your area.
Filing for Chapter 13 bankruptcy differs in that you make payments based on your income each month for three to five years. The money is then distributed to your creditors. If you’re not behind on your mortgage payments, you might be able to keep your house.
Both types of bankruptcy remain on your credit report for years. Expect to see Chapter 7 listed for 10 years and Chapter 13 listed for seven years.
How to Choose the Right Debt Relief Option
Selecting a debt relief plan depends on the severity of your specific financial situation. Start off by looking at all of your balances, interest rates, and other details of each account so you know your full financial picture.
Then you can get a better idea of what you can realistically expect to pay off on your own versus how you would fare with a different option. If your credit score is good, consider looking at some debt consolidation offers from a credit card company or lender. If you don’t get approved, you can then consider some free consultations with the more drastic options we’ve discussed.
The Bottom Line
When you’re feeling overwhelmed by your debt, putting off action is only going to make it worse. As soon as you realize you’re behind on payments or can’t envision how to lower those outstanding balances, it’s time to dig in and figure out a new path. Tackle a new budget that helps you save more, then start researching which debt relief option is best for you. When you make it a true priority in your life, you’ll start to see some major differences in your financial trajectory.