There are many debt relief options to help you get out of your current financial crisis. Of course, it all begins with you understanding what got you in this situation in the first place. This will help keep you out of debt and also allow you to achieve debt freedom a lot faster.
Once you have identified that, you may want to take a look at your finances and the type of debts that you owe. There is no shortage of debt solutions. However, you need to know the right program that will suit your problems best. There is no one formula and to maximize your limited resources, you need to base your debt relief program on how much you can afford to pay your debts.
There is a specific solution depending on your financial situation. Each of our status is unique but we usually fall under one of three categories when it comes to our debts.
Before you find the category and debt solution that suits you best, take a look at your budget first. Identify your income and expenses (excluding debts) and get the difference. Whatever is left will be the disposable income that you can allot for your debt payments.
Debt relief for people with money for minimum payments
The first financial situation is having enough disposable income to cover your minimum payments. The extreme scenario is having a little deficit on your monthly requirement – but nothing significant. If this is your financial standing, you can afford to use debt consolidation to solve your problems. The benefits of this includes the following:
Lower monthly payment
Possible lower interest rate
Longer payment period
Single payment scheme
Does not affect your credit score.
What you have to know, which is important too, is that this option will not give you a debt reduction. The lower monthly payment is possible because your current balance is stretched over a longer term. The lower interest rate is also responsible for this. But in terms of reducing what you owe, there will be none of that. You will still end up paying for everything that you owe. This means a steady and stable income is needed. You should also boost your savings so that you can meet your debt payments without a problem. This program takes 5 years to complete so you need to be sure that your income can keep up with such a long payment period.
There are two popular ways to consolidate your debts.
Debt consolidation loan. This option involves getting a low interest loan that you will get to help you pay for your multiple debts. Once the loan is approved, you can simply go to your creditors, pay them all completely and just concentrate on the single payment that is required from this one loan. To maximize this option, you need to make sure you will get a low interest – which means you either have a good credit score or a collateral.
Debt management. In case you do not have the ideal credit score or collateral, you can use debt management instead of getting a loan. This option allows you to work with a credit counselor who will help you come up with a debt management plan that will contain your proposed lower payment terms. The counselor will present this to the creditor. When approved, you will send a single monthly payment to the counselor who will take charge of distributing the funds to your different creditors.
With the latter, you need to be careful about your choice of company. Make sure you brush up on your knowledge of the Telemarketing Sales Rule (TSR) to help you identify the legitimate companies from the not.
Best debt solution when you cannot meet your minimum payments
In case your financial situation cannot afford to meet your minimum payments, you obviously need a debt reduction. This is when debt settlement becomes the better option for debt relief. The whole idea of this program is to convince your creditor that you are in a financial crisis. You want them to allow you to pay only a portion of your debts and have the rest forgiven. This program will give you the following benefits:
Eliminate collection calls (if you work with a debt negotiator).
Reduce your current balance significantly.
Get you debt free in 2-4 years.
Possible elimination of interest rate and other charges.
The catch here is that you need to default on your payments in order to convince your creditors that you are in a financial crisis. This would mean you have deal with a damaged credit score. Instead of paying your creditors, you will send your money in a secured account and grow it there until you and the creditor comes into an agreement.
While you can do this on your own, you will get a lot of benefits by getting a professional to work with you. The debt negotiator will bring their expertise into the whole process. You will also be left in peace because part of their service includes taking over communication calls. Just make sure that they are certified by authority training organizations like the IAPDA or International Association of Professional Debt Arbitrators.
Credit relief for people in severe financial conditions
In case your conditions are quite severe, your option is to file for bankruptcy. This means your income is barely enough to pay for your basic necessities or you have very little income coming in (or none at all). Most financial advisers will tell you to exhaust other options first before opting for this one. This will have severe effects on your credit score and that will make it even more difficult to recover after getting debt freedom. Having bankruptcy on your credit report will make it hard for you to get financial assistance for a home or a business that you want to put up.
When you file your petition, the court will assign the type of bankruptcy that you qualify for. This involves the means test. If your income is lower than the state average, you can qualify for Chapter 7 wherein your assets will be liquidated and anything that does not get paid will be discharged. If your income is above the average, you qualify for Chapter 13. This means you will be subjected to a repayment plan. This type of bankruptcy is not so different from debt settlement.
The US Courts website hold a lot of information about bankruptcy that will help you understand the whole process. It is best to gather information first so you know your options very well. That will help you make smart choices about your debt solution.
Diana hates debt just as much as you do. She is a finance writer for National Debt Relief. She aims to provide the best information to win the battle against debt.