This makes it crucial to get rid of your financial burdens as soon as possible. For this, you can look at the various debt relief options available to you. These solutions are designed to give you better loan terms so that you can pay off your debts sooner.
They also involve debt settlement through partial payment and even filing for bankruptcy. But debt relief is not the best option for every person looking to get rid of debt. Read on to find out the various nuances regarding this solution along with its consequences.
When to consider debt relief
Here are the situations which warrant applying for debt relief:
- Your total outstanding unsecured debt is half or more than half of your income.
- There is no way you will be able to pay off your unsecured debt within the next 5 years no matter how hard you try to.
Unsecured debt refers to debts related to personal loans, credit card bills, and medical bills. In case you feel that you will be able to pay off your current debt over the next 5 years, don’t apply for debt relief. Instead, look at solutions for consolidating your debts, set up a tight budget for your expenses, and talk to creditors about more favorable terms.
Various types of debt relief
Debt management plans
Debt management helps you pay off your credit card debts at a lower interest rate than normal. For this, you will have to get in touch with a credit counselor. Credit counselors and credit card issuers work together to offer debt management services to customers. In this plan, you will have to make only one payment to your credit counselor who will distribute the amount to your creditors. Till your credit debt is paid off, your credit cards will be closed. The goal is to cut off credit spending so that you can focus on repaying what you already owe before buying on credit again.
While debt management in itself does not impact your credit score in any way, the closure of your credit card accounts will have a negative impact. You can start using credit again only after paying off your debt. If you opt for this plan, you need to make sure you don’t miss even a single payment as this can lead to plan cancellation.
Debt settlement is not usually recommended to most people. It is advised only to those who are not able to claim bankruptcy and have massive debts piled up. The reason is primarily that this process can take months or even years to complete and can significantly damage your credit score.
In debt settlement, you hold off paying your creditors. Instead, you pay any amount you can into an account that’s maintained by the debt settlement company. The company then pays the creditors when a particular sum accumulates in your account.
Since the creditors don’t get any payments for a long time, they may lose hope of recovering their money and settle for lower amounts or waive off your debt. But till this happens, they may charge you penalties, repeatedly call you, issue legal notices, etc. And not paying your bills hurts your credit score as well.
File for bankruptcy
This is an option for those who will never be able to repay what they owe. Get help from a bankruptcy attorney first to get the best possible advice on how to go about it. Here’s what you should know about this option:
- It can get rid of most personal loans, credit debt, and medical dues.
- It doesn’t erase child support payments, taxes, and student loans.
- Your credit score will be severely damaged, and bankruptcy will stay on your record for 10 years.
- You cannot file for bankruptcy again for 8 years.
- If you have a co-signor, that person will be held liable.
- Not everyone can qualify.
Debt relief on your own
Get in touch with creditors and explain your situation. Most of them may be willing to lower your rates or accept lower amounts as settlement. Or apply for a debt consolidation loan and convert your various payments into a single payment at a lower rate. As long as you keep paying, your credit score will be intact.