Life happens to every one of us. Sometimes we borrow money and suddenly we are not able to make the payments. Before you turn off your phone and crawl into a hole, read the five options below to determine how to best move forward. Here are five ways to get debt relief:
1. Debt Restructure: Most lenders are happy to work with you to provide relief during a financial hardship as long as you contact them immediately. Temporary or permanent changes may be made to your loan repayment in order to help you through a challenging time. This may include lowering your monthly payments, increasing your interest rate, and/or extending your repayment term.
Pro: Save money by avoiding hefty collection fees and get back on track faster. Contacting your creditor and being honest could prevent repossession.
Con: Your credit score may be affected if you are not making minimum payments, even though you have an agreement and permission from your creditor.
2. Debt Consolidation: A debt consolidation loan may be the right choice if you have outstanding debt with more than one creditor such as multiple credit cards. Typically your lender will make arrangements to “pay off” those other outstanding debts. What this means is, those debts will be added into your new consolidation loan as you are still responsible for paying those balances. Keep in mind, you may need to meet qualifications such as a minimum debt-to-income ratio, and/or credit score in order to qualify.
Pro: You could save thousands of dollars in interest. Managing one payment rather than many can be less stressful when it comes time to pay your monthly bills. Plus, it is likely you will pay off your debt faster.
Con: Once you see your credit card balances lumped into one sum, you may feel compelled to go out and spend more. You must remain committed to getting rid of debt.
3. Credit Counseling: Often not-for-profit financial institutions such as your local credit union will offer financial counseling, which may lead to enrolling you in a debt management plan. In a debt management plan, the credit counselors will contact your creditors in order to negotiate a reduction on interest rates and fees.
Pro: Working with your creditors proves that you really want to pay your debt. This creates “good faith” which could come in handy in the future when you are ready to borrow for future purchases such as a home, or new vehicle.
Con: A debt management plan may charge a monthly fee for their service. It may also take several months, or even years before you see your credit score improve.
FYI – Advantage Financial FCU works with GreenPath to provide members with a financial education, and counseling program. To learn more about GreenPath, click here. 4. Debt Settlement: A debt settlement company may not have your best interest at heart. Yes, they will negotiate with creditors on your behalf but it will cost you in the long run. You will be advised to stop making payments to your creditors, and instead, deposit money into an account they set up for you. Once they have reached a settlement with your creditors, they will use your money to pay off your debt, keeping a percentage.
Pro: Your total debt may be reduced by 40 percent or more. For example, if you have $30,000 in debt, a successful settlement program can cut the amount you owe to as little as $16,000 before fees.
Con: Your credit score will take a hit because you stopped making payments. After settling, the creditor will update that debt’s status as being “settled.” Your forgiven debt is taxable which means you will owe on your next tax return.
(The FTC regulates debt settlement companies and restricts certain actions. For example, debt settlement companies cannot charge fees in advance. All fees must be taken as a percentage of the settled debt. Additional rules stipulate that any dedicated accounts created as part of a settlement plan must be owned by you, and you can withdraw funds from that account anytime.)
5. Bankruptcy: Bankruptcy should be the final resort for managing your debt. Bankruptcy is a legal process that can allow you to eliminate debt. Chapter 7 Bankruptcy, which has strict income requirements, can liquidate all your debt though some of your assets will be sold to pay it off. A Chapter 13 Bankruptcy requires you to work with your creditors to create a payment plan where you will pay a percentage of the debt actually owed.
Pro: Bankruptcy wipes out almost all debt; some people find it less stressful than working with creditors especially if the hardship is permanent and you will not be able to pay.
Con: Bankruptcy is very damaging to your credit score and can impact your future eligibility for loans and lines of credit as well as the price you pay for it. A bankruptcy will stay on your credit report for seven to ten years and can reduce your score by up to 200 points.
