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No one wants to be in debt, yet 80% of Americans have some form of it. Mortgages, student loans, and car loans are are on the rise. Credit card debt alone is at $784 billion in the U.S.
Almost 70% agree that debt is a necessity, but they’d rather not have it. But how do you get out of debt?
There are many debt relief options available and in this guide, we explain five of them.
How in Debt Are You?
Before we discuss debt relief programs and your debt options, you need to know how much debt you owe. You may have a ballpark figure, like the balances of your mortgage and car loans, but it can get a little tricky.
You can find out who you owe money to and how much by getting a free credit report from one of the nationwide credit reporting agencies. The Federal Trade Commission requires all three (Experian, TransUnion, Equifax) provide you with a free credit report every 12 months if you request it.
Federal student loans are the most difficult to figure, especially if your loan has accelerated. This means that if you default on your student loan, the entire balance becomes due immediately. You can no longer access forbearance or repayment plans.
Student loan debt, and the complicated rules around it, is one of the biggest reasons people feel they’re drowning in debt.
Understand the Consequences
You also need to know the consequences of being in debt. The obvious consequence is that your credit is negatively affected.
If you’re in current financial peril and stop paying on your debts altogether, creditors who hold secured debt can collect the collateral. In other words, a bank can start foreclosure proceedings or repossess your car.
Unsecured creditors can take you to court and seek a judgment against you. This could result in a lien placed on your property or garnering your wages.
Accelerated student loans can follow you for years. The guarantee or collection agency may even garner your wages. The Dept. of Education could refer your case to the Department of Justice for legal action.
5 Debt Relief Options
Debt relief doesn’t happen overnight. It’s a long process that isn’t pain-free either. If you can repay your debts by changing your spending habits, this should be your first option.
If you believe you can repay your unsecured debt within five years, consider doing it yourself. Reach out to your creditors for repayment plans, consolidate your debt, or restructure your budget.
You should consider credit consolidation, debt settlement, or bankruptcy if:
- You exhausted all your options for repayment and have no hope of repaying your unsecured debt in the foreseeable future.
- The total balance of your unpaid, unsecured debt equals at least half of your income.
If there’s no hope in either of these solutions, you have four other options.
1. Credit Counseling
The Credit CARD Act of 2009 requires all credit card companies to publish a toll-free number for consumers to get credit counseling help. Credit counseling agencies will go over your debt and income and offer you a debt management plan or consolidation.
Some organizations have agreements with creditors to reduce the interest rate on your debts. They will work to help you choose a solution that works best for your budget.
You don’t have to agree to a plan. You may take the counselor’s advice and suggestions and try it on your own.
Most credit counselors are non-profit and get accredited by the U.S. government. Do your research to make sure you’re using an accredited credit counselor or to find government debt relief programs.
2. Credit Consolidation
One of the options a credit counselor will offer is debt consolidation. In debt consolidation, you take out one loan to pay off all your unsecured debt.
The goal is to have one low-interest rate and loan as opposed to several. So, instead of paying five creditors every month, you now pay one.
3. Debt Management
This is another option often suggested by credit counselors. The goal is to get rid of your debt by reducing your interest rate and fees. You should have a more manageable lower monthly payment as a result.
Debt management programs are very organized and keep your credit score intact. Your counselor will go over a new budget for you that you need to adhere to. You will also have to promise to pay back the entire principal amount over time.
4. Debt Settlement
Debt settlement programs are a popular choice because your lender agrees to accept less than what you owe. The caveat is that you have to pay one lump sum to settle your unsecured debt. You aren’t required to take out a loan, so it’s a good option if your credit is poor.
One of the most important factors in debt settlement is finding an accredited and reputable company to help you. Often, debt settlement can have a negative effect on your credit. This could impact future loans and credit lines.
Learn more about the pros and cons of debt settlement before you decide this is the best option for you.
Of all the debt relief programs, bankruptcy is the most damaging. It does offer financial relief but the consequences of bankruptcy are very severe. Most credit counselors will only suggest bankruptcy in extreme situations.
Some feel that bankruptcy gives them a fresh financial start but there are many conditions and consequences, which is why it’s used as a last resort.
The two most common bankruptcies are Chapter 7 and Chapter 13. Chapter 7 cancels or forgives your debt. Chapter 13 sets up a 3-5 repayment plan through the courts to eliminate your debt.
Filing for bankruptcy is expensive. This is a legal proceeding that requires you to hire a lawyer. As such, you’ll pay a lot of court fees and legal fees.
Because bankruptcy stays on your credit for 7-10 years, your credit is ruined. Lenders that do approve you for loans will charge high interest rates.
Finally, bankruptcy doesn’t eliminate or forgive all debts. You’ll still owe and have to pay on student loans, child support, and back taxes.
Solidify Your Financial Future
Once you’ve reviewed your debt relief options and decide on a program, you must stick with it. It’s often a long and arduous process, but in the end, it’s worth it.
You’ll have the ability to start establishing good credit again and be better prepared to maintain it. InNews can help. Our business/financial blog offers expert advice on everything from credit cards to incorporating a business.
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