If you are overwhelmed with credit cards and other types of debt, you may feel like you are at the financial breaking point. You can't afford minimum payments anymore, the interest keeps piling up, and the amount owed never goes down. What should you do? The last thing you should do is simply stop paying; you can eventually be sued and have your bank accounts levied and income garnished.
There are several options to consider for debt relief, including debt consolidation, debt settlement, bankruptcy, and debt forgiveness, all outlined below. Debt relief can be a good choice, depending on the circumstances, as long as you understand the benefits and drawbacks of the selected plan. If you have questions about debt relief after reading, speak to a Vero Beach bankruptcy attorney. They can outline all of your debt relief options.
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What Is Debt Relief?
Debt relief is a general term for reorganizing debts to make monthly payments smaller. You can achieve debt relief on your own or with the assistance of various companies. Working with a debt relief organization can get you back on the right track, but each debt relief option has various benefits and drawbacks you should carefully consider. Generally, debt relief plans allow some or all of these benefits:
- Lowering interest rates
- Waiving fees
- Refinancing loans
- Reducing what you owe
- Extending loan terms
- Possibly avoiding bankruptcy
You should consider some form of debt relief when you have no hope of paying off your unsecured debt within five years, even after making extreme spending cuts. Also, consider debt relief if your unpaid, unsecured debt is half or more of your gross yearly income. However, if you can pay off your debt within five years, you can do a DIY debt reduction plan.
Whether you choose debt consolidation, settlement, bankruptcy, or something else, your debt relief option will affect your finances for years. Choosing carefully is important; many people benefit from discussing their debt relief options with a bankruptcy attorney. Make sure that you understand the different types of debt relief outlined below. You also should understand how debt relief will impact your taxes and credit score. Go over both of these subjects with your tax advisor.
Also, there are times when you should not consider debt relief. First, if you continue to add debt, you are not ready for any debt relief program. The first step to controlling your debt is to stop spending and adding to what you owe. Second, you aren't right for debt relief if you're not interested in making a multi-year commitment to paying off your debt.
Debt Consolidation
Debt consolidation means rolling several high-interest debts into a new loan with a lower rate. You might use a debt consolidation loan to combine your credit card, medical, and personal loans into one payment. This reduces the chances of missing a payment, and you can reduce interest.
One form of debt consolidation is getting a cash-out refinance or second mortgage on your home. If you qualify, you can take some of your interest and pay off your debts. The property secures a home loan, so the interest rate is lower. However, you should think carefully before taking out a loan on your home to pay off debt; your house is on the line, so you need to be positive you can make the payments.
Another option is to apply for a zero-interest credit card and combine all your debt into that one credit line. You must pay off the credit card before the end of the introductory period, or the interest will be due. However, if your credit is damaged, you might not qualify for a low-interest credit card.
Debt Settlement
In debt settlement, you negotiate to settle your debts for less than the amount owed, representing debt relief. Most debt settlement payments are lump sums, but some lenders may let you make several payments. Debt settlement can be beneficial because it allows you to pay only part of what you owe, and you can avoid bankruptcy. Debt settlement also allows you to pay your debt off faster, thus saving interest.
The amount paid in the debt settlement agreement depends on the amount of debt and the negotiations you have made. You can work with your creditor directly to work out a debt settlement plan, or a debt settlement company can do it for you.
Having a company negotiate with your credit card providers sounds good, but it can be expensive. It is common for debt settlement companies to charge thousands in fees to settle credit card debts. Also, many debt settlement scammers will take your money and do nothing for you. Ensure that the debt settlement company you select is highly rated with the BBB and has positive online reviews.
Remember, if the debt settlement plan reduces your debt, you can receive a 1099 in the mail and be required to pay taxes on the money to the IRS. You should always understand the tax impact of any debt relief program you're considering.
Debt Forgiveness
Some programs forgive your debt. For example, if you have a lot of student debt, you might qualify for various debt forgiveness programs, depending on the situation. The Public Service Loan Forgiveness (PSLF) program allows certain federal student loans to be forgiven after 120 payments or ten years if you work with a qualifying public service employer.
If you have questions about debt forgiveness for your student loans, your lender can answer them and provide information on available programs and eligibility criteria. Communicate openly with your lender to stay informed about potential options for debt relief and understand how these programs may apply to your situation.
Credit Counseling
Credit counseling organizations can advise on debts and finances, assisting in developing a budget to pay down what you owe. Working with a credit counselor effectively allows many overleveraged Americans to get free or inexpensive debt advice. Most credit counseling companies are non-profits, and their counselors are well-trained in money, finance, and consumer credit. Credit counselors assess your finances and aid in devising a plan to address money issues. They can also guide you in establishing a debt relief plan, enabling you to pay off your debts within a few years.
Debt Management
Debt management is a structured method for paying off unsecured debt, such as credit cards and personal loans. If you feel overwhelmed by your credit cards, you can consult with a debt management company and one of their credit counselors to guide you in structuring what you owe into an affordable, fixed plan. The debt management firm will review your financial situation and then work with you and the creditors to create a debt management plan.
Most debt management plans give you three to five years to pay off your debts. The creditors may let you reduce interest rates and waive fees as part of the plan. When all parties involved agree to the debt management plan, you make one payment to the firm each month. You make payments to the creditors listed in the debt management plan.
The debt management company will probably charge a fee for their services, including a setup or enrollment fee and a monthly fee. However, some credit counseling companies are non-profits and may not charge you for their services. This program can save you interest, time, and money, but not every credit card company will always agree. Some companies may still sue you for what you owe.
DIY Debt Relief
You can go to a company and sign up for one of the debt relief programs above. But if you have financial discipline, there's no reason you can't do one or more of these options on your own. You can do what many credit counselors do in their debt management planning. Contact your creditors to discuss why you are behind on payments and what you need to improve. Most unsecured credit companies have hardship programs and can reduce your rate and certain fees. Also, learn about debt settlement and secure a debt settlement agreement with your creditors.
If the debt isn't too large (more than half of your gross yearly income is a good measure), you can pay down your debt without entering a debt relief plan. For instance, if you still have a 700 or higher credit score, you might use a zero-interest credit card to reduce your interest rates by transferring your debt to the card. You also can talk to your mortgage lender about getting an unsecured debt consolidation loan.
When doing a DIY debt reduction plan, be sure you have the discipline to avoid adding more debt. As you reduce the balances on your cards, don't run them up again!
Avoid These Types Of Debt Relief Companies
Many debt relief companies are online, and not all are legitimate. Ensure you choose a debt relief company with a strong online reputation that the BBB recognizes. You also should avoid debt relief companies that offer any of the following:
- Levies fees before settling any debts.
- It says it can settle all your debts for a certain reduction percentage.
- Guarantees that all debts will disappear.
- Tells you to stop speaking with creditors.
- It tells you it can stop all debt collectors from calling you; this can only occur after submitting your bankruptcy application to the bankruptcy court.
- Guarantees payment of unsecured debts at a fraction of what you owe.
Typically, it's advisable to avoid debt relief companies making promises that seem too good to be true. Always be aware of the charges you incur and understand how much of your debt the program will pay off, when, etc.
Bankruptcy
All of the debt relief options mentioned earlier are to avoid the ultimate debt reduction strategy: bankruptcy. If you declare Chapter Seven bankruptcy, creditors can liquidate your assets to pay off your debts. Chapter Seven can be a good choice for someone overwhelmed with unsecured debt, and debt relief options don't sufficiently reduce your payments.
Declaring bankruptcy is a serious step and should be your last option. Fortunately, most states have generous exemptions in the bankruptcy law, so many debtors lose little, if any, assets. For example, a car for each party is usually exempt from liquidation, as is a certain amount of home equity and personal property. People living in homestead states, such as Texas and Florida, have their homes exempted from being liquidated in bankruptcy.
How Does Debt Relief Affect Your Credit Score?
Another thing to remember about debt relief is its effect on your credit score. The impact on your FICO score depends on the option you select and what your score was to begin with.
Choosing debt settlement might require falling at least three months behind before setting up a debt settlement plan. Most negative effects on your credit may have already occurred by that point. So, setting up a debt settlement plan that reduces your debt may not worsen your score.
Debt management may have a small effect on your credit if all creditors report your accounts as paid as agreed. Credit counseling may not affect your credit; it might even raise it if you can lower your debts and make on-time payments.
Before signing any debt relief plan, know what the program will do to your credit score, what it will cost, and how long it will take to pay down or pay off your debts. It also is smart to regularly check your credit score and see if the plan has had any positive or negative impact.
Speak To A Bankruptcy Attorney Today
Are you considering applying for debt relief, such as debt consolidation, debt settlement, or bankruptcy? There are many things to consider before deciding which debt relief option is best for your situation. Much depends on your debt, your gross annual income, whether you are still accumulating debt, and more. Talk to an experienced bankruptcy attorney today to determine if debt relief or other legal options are best for your situation.