You’ve inevitably heard a lot of terms thrown around while researching debt relief solutions. Among concepts like debt management, debt consolidation, debt settlement, and bankruptcy — you might be scratching your head wondering what the best option is to improve your financial standing.
Keep reading for a simplified breakdown of debt relief options.
A major roadblock in the personal battle against debt is the emotional turmoil weighing the mind down. Debt makes doing daily tasks much harder. It filters the lens we live life behind. This is why debt management, despite not actually saving debtors any money, still offers some appeal.
Debt management programs collect one payment from debtors and then distribute it among their creditors, often at lower amounts and interest rates. Be advised though that debt management programs do charge monthly fees and your credit will suffer from enrolling in a program.
Whether through an unsecured means like a balance transfer or secured one like a home equity loan, debt consolidation provides much-needed breathing room for people struggling with multiple payments and don’t want to enroll in a program.
Debt consolidation works by lowering a debtor’s overall interest rate while simplifying their monthly payments into one total. Alternatively, balance transfers usually carry a three-to-five percent fee, but also offer introductory zero-interest rates for as long as 18 months, allowing the newly consolidated principal to be attacked aggressively. Consolidating debt using assets like a home or car can make sense but do contain risk given that real possessions are at stake if you can’t make your payments.
Falling behind on payments brings a barrage of creditor calls and late payment mail. It also hurts credit, causes stress and increases overall debt. Debt settlement, which is the process of negotiating to resolve outstanding balances to lower lump-sum payments.
Many debt settlement companies, such as Freedom Debt Relief, may help with the stress and, over a two-to-four-year process, could reduce debts by substantial amounts. If you agree to the repayment amount, they’ve negotiated, you’ll pay a fee based on what percentage was resolved. And be prepared to pay some tax as a result; the IRS views forgiven debt as income.
Bankruptcy is proof that the rock bottom of debt is actually a modest trampoline. Both chapter seven and chapter 13 bankruptcy can solve a debtor’s quandary, through similar costs, but different timelines and effects.
Chapter seven only takes three-to-six months to play out but might result in the liquidation of your personal assets to repay your creditors. A chapter seven filing also stays on credit reports for a decade. Chapter 13, on the other hand, allows debtors to keep their assets, as long as they can meet court-ordered payments for three-to-five years.
Do It Yourself
In life, there’s always the proper channel of action and a resourceful alternative. Third-party companies certainly have expertise in navigating difficult financial situations, and they provide crucial support during trying times. However, you never know what you can accomplish with a phone call.
Reaching out to creditors before you start to fall behind on payments could award you a grace period or payment restructuring. It could also result in a debt negotiated to be paid at a reduced sum. Even by your own means, you most definitely have the option to take one monthly amount for debt payments and split them among your creditors based on priority.
While having one debt relief option would make the decision process infinitely more accessible, it’s definitely a good thing that debtors have various solutions available. At the end of the day, debt is personal, and so too is the path a debtor takes to freedom. Weigh the routes above against your level of debt and the trajectory you’re heading. Then cherish the small wins and progress along the way; you’ll need them to reach economic independence.