If you face financial problems because of mounting debt, you can only recover if you decide to change your situation. You should combine your decision with a determination to ensure you complete whatever debt relief option you pursue.
Several options for achieving financial freedom are available to you, each with merits and demerits. For example, debt relief could involve persuading creditors to accept less than the total amount owed, working on a payment schedule to lower your payments, seeking changes in your interest rate, or wiping out the debt altogether in bankruptcy. A credit counselor, financial expert, and bankruptcy attorney would help you decide the best option that is acceptable to your creditors and viable for you.
Understanding Debt Relief Options
Some of the debt relief options you could choose from include:
Paying the Monthly Balance
The most apparent and least complex debt relief option is paying the monthly balance. It is a disciplined way of offsetting your debt every month. The aim is to meet a minimum payment requirement. However, you can choose to pay more than the minimum monthly installment. If you only target the minimum payment requirement, it will take longer to complete it and you will pay more in interest.
The primary advantage of paying the monthly balance in full is that you will not have the burden of high interest rates and late payment fees. In addition, your credit score will not suffer if you maintain the habit of paying on time. However, you will still spend a long time clearing your debt unless you pay more than the minimum monthly amount.
This option is ideal if you have ample income to meet the minimum payment requirements. If your disposable income exceeds the minimum installment, you can opt to pay off the debts with high interest rates at a higher amount than the minimum to clear them earlier and save on interest. However, you could review your expenses and see where to save further if you do not have sufficient disposable income. You could opt for debt settlement if paying the monthly balance is not working.
Debt Settlement
Debt settlement is another popular option for debt relief. This option involves seeking the assistance of a debt relief company or a debt settlement agency. The company or agency must negotiate with the creditor on your behalf so that the creditor can reduce the outstanding amount that you are required to pay. Usually, the negotiated amount is a certain percentage of your initial balance. Once you diligently pay off the amount, you will be forgiven, meaning that you will not pay the rest of the debt.
Generally, the debt settlement process will start with evaluating your financial capabilities. Once the relief company or agency knows the amount you can pay, you will be requested to deposit it in an insured financial institution. While doing this, you will stop paying the creditor. When the creditor discovers that you are not paying and he/she files a lawsuit in court, the company or agency will come in with a proposal for a debt settlement. It is crucial to note that your credit rating will be negatively affected when you are involved in a debt settlement agreement. However, your credit report will improve after you have settled all your debts.
Typically, you can negotiate with creditors yourself. However, hiring a professional to be your negotiator is the best option. A debt relief expert's professionalism and negotiating skills will yield more results than you can on your own. Apart from the negotiating expert, you can also engage a company that has been in the industry for an extended period of time. In addition, the existing working relationship with the collection agencies and creditors could benefit you. This will increase your chances of securing a favorable debt settlement arrangement.
You need to show that you cannot pay off the minimum payment. A legitimate debt relief company cannot represent you if you only target a credit company by pretending you cannot pay the remaining loan balance. Securing a respected debt settlement company to assist you will be hard if you are dishonest.
Filing for Bankruptcy
Bankruptcy is the least desired debt relief option by creditors, financial experts, and even debtors. This is when you declare that you have no money to offset your outstanding debts. In this case, a bankruptcy court is involved and you risk losing your assets to creditors in some situations, especially if you file for Chapter 7 bankruptcy. Losing your assets to creditors does not assure that the assets will clear the whole debt.
This option could hurt your credit score, credit history, and credit report. In addition, if you require financial help in the future, lending institutions will likely be hesitant to lend to you if you have a bankruptcy history. It is at the bankruptcy judge's discretion to determine if you are eligible for Chapter 7 or Chapter 13. You could receive forgiveness for the entire debt under Chapter 7, whereby your non-exempt assets will be liquidated and the proceeds used to pay your creditors. On the other hand, you will pay a percentage of your debt under Chapter 13, which involves creating a repayment plan for 3 to 5 years.
Debt Management
Also known as credit counseling, debt management involves enrolling in a program offering debt counseling. It is similar to debt settlement, but the debt management company handles the funds in this case. The debt management company consolidates your debt and pays the creditors on your behalf. Your creditors typically receive payments from the account into which you deposit the money.
The debt management company will also assist you in reducing the outstanding balance, monthly payment, and interest rate by negotiating with your creditors. Unfortunately, this will also influence your credit report negatively, so you should not be surprised when you discover your score has declined.
A debt management company also differs from a debt settlement company in that they offer counseling services. They will assist you in overcoming the root problem, especially your lousy spending behaviors.
Debt Consolidation Loans
Debt consolidation involves combining all your debts into one so that you can offset them. This will help you maintain only one monthly payment and remove the high-interest debts. The home equity loan is the most popular type of debt consolidation loan. This loan involves borrowing against the equity of your home.
It is easy to manage the debts under this debt relief option because you only focus on one monthly payment instead of handling multiple installments. However, you can only settle on this option if the monthly payments are lower. This option could also affect your credit report adversely. The good news, however, is that your credit score will pick up once you diligently pay all the debts on time.
With a home equity loan, you should keep yourself in line because if you fail to pay your debt, your home will be at stake. Therefore, you must adhere to the payment terms and your budget plan for the new consolidated loan.
Reach Out To Your Creditors
Your creditors could have payment modification programs and proprietary debt relief options that you can participate in, but you need to inquire about them first. First, explain your situation and the current hardship when you call them, especially if you are dealing with unexpected expenses or a job loss. Then, inquire about the debt relief or discount programs they provide. If you have a history of making prompt payments, use it as a negotiation tool when seeking payment assistance. For example, you could secure permanent changes in the monthly due dates, modified payment plans, or due-date extensions.
If you are a homeowner, a mortgage modification can assist you in retaining your home. This program will add your remaining balance to your loan amount. The mortgage lender will then make changes to your payment plan accordingly. If you are seeking credit card debt relief, you could reach out to your issuer and request a waiver on the late fees or a reduction to make repayment more affordable.
No matter your approach, you do not have to fear asking for debt help. The creditors will not punish you for exploring your options. This can be a good option for individuals who:
- Can consistently repay their debts in smaller amounts over a certain period.
- Have an overdue debt that has not gone to collection.
- Could benefit from rolling an outstanding debt into their loan balance.
- Can benefit from a different payment due date or delayed payment.
- Have not yet reached out to creditors to inquire about debt relief options.
Create and Review Your Budget
If you explore your budget for ways to cut costs, you will not struggle with your debt payments. If you have not kept your budget up to date or do not have one, this option will sensitize you to overspending. Creating or reviewing your budget will also help you identify recurring costs that you can cut or eliminate.
For example, you could discover that your electricity expenses are high and inquire from your provider regarding discount programs. You could also look for ways to lower student loan payments, like using income-driven repayment plans. You could also lower student loan payments by stopping payments temporarily through deferment or forbearance. This is often a good option for individuals who:
- Want to ensure they are not inadvertently adding to their debt.
- They are not sure of recurring costs or where their money is going.
- Have not reviewed their budgets or do not have a budget to help with debt management.
If you do not have a budget, you can start small. You can start by checking your bank account and creating a list of recurring expenses and income from the previous month. The costs include debt payments, utility bills, mortgages, and rent payments. You could also add grocery runs; this will give you an estimate of your minimum costs per month. Next, you can add less-essential expenses, like dining out and entertainment.
You can also automate this process by using a budgeting app. By understanding how you spend your money, it will be easy to make the necessary adjustments. For example, you could try meal prepping the following month if you spent more money dining out than expected. If you discover you are signed up for a subscription service you do not use, cancel it. When you struggle with bills, saving even $10 can make a big difference. Always check on your monthly bills and expenses. This will help you identify overspending and control it.
When to Seek Debt Relief
You should opt for debt settlement, debt management, or bankruptcy if the following is true:
- The total of your unpaid unsecured debts is not reducing even though you making payments.
- You lack hope of repaying unsecured debt in five years, even if you take extreme measures to cut spending.
Conversely, you could consider a DIY plan if you could repay your unsecured debts in a few years. This could include strict budgeting, appeals to creditors, and debt consolidation.
However, you need to be aware of fraud because the debt relief industry has many scammers who are always ready to take your money. In addition, most individuals who enter debt relief programs often fail to complete them. As a result, your debt could, at times, grow bigger than when you began. Debt relief can give you breathing room or a new beginning to make real progress.
Usually, you need to understand and verify the following points before entering into any debt relief agreement:
- The tax implications.
- The requirements for eligibility.
- The fees you have to pay.
- The creditors owed and the amount — If your debt is in collections, you must understand the person owning the debt to ensure the payments go to the right agency.
Find a Bankruptcy Attorney Near Me
If you are struggling with debt repayment, finding the appropriate debt relief option can be a sigh of relief. With so many debt relief options available, choosing the right one for your situation can be daunting. However, with the help of an experienced bankruptcy attorney, you can explore different debt relief options to find the one that suits your situation best. At Modesto Bankruptcy Attorneys, we have a team of experienced bankruptcy attorneys to help you explore different debt relief options. Call us at 209-314-3010 to speak to one of our attorneys.
