In a society where instant gratification has become part of our culture, it’s easy to develop less than desirable spending habits. Having a good, stable job might make you feel like you can keep taking on big financial responsibilities, but when something happens unexpected the next step is to make sure your debt does not get out of control.
Getting laid off, falling seriously ill or investing in ventures that don’t pan out can all send your finances into a tailspin. Before you know it, you could have serious debt on your hands with limited capabilities to pay it off. If you’re in this situation, filing for bankruptcy isn’t necessarily your only choice. There are several ways to address your finances and a great first start is with a debt relief program.
While you can opt to battle debt on your own, things can move along faster and easier if you consult a professional debt relief agency. These firms know the ins and outs of the finance sector and they’ll be able to provide you with recommendations and advice that can lighten up your load. They can also make sure that your recovery from debt is done in a sequential and sustainable way, allowing you to get back in good financial shape and feel good about getting your debt paid down and moving towards being debt free. Here are some of the common debt relief options that these agencies offer:
- Debt Settlement: Debt settlement refers to the negotiation by a third party with your creditors to dramatically bring down your debt and reduce the balance by a large percentage. The third party negotiates with the creditor by using a lump sum as leverage to pay off the balance.
Here’s an example: Suppose a person owes his creditor $10,000. The debt relief company will ask the creditor to consider “forgiving” 60% of what the debtor owes. If the creditor agrees, it receives the 40% immediately and the rest of the debt is cancelled out. The debtor goes away with a clear record and the third party gets paid a fee that they and the debtor initially agreed upon.
Many people don’t know this is an option and although it might seem too good to be true, there are thousands of examples of this type of success. Sometimes, creditors might doubt the debtor’s ability to pay the total amount and decide to get back as much as it can in a short amount of time. However, there are also cases when the creditor would much rather let the debt remain and take its chances on having the debtor pay for what he owes plus interest based on their original agreement.
In order to pay this lump sum, the debtor agrees to save up by depositing a fixed amount into a savings account each month. When he has saved enough in this account, the debt settlement company contacts the lender and negotiates on the debtor’s behalf. Once the creditor agrees to the payment, the original amount owed is reduced and the debt will be paid off.
- Debt Consolidation: Debt consolidation assumes that there are several debts that need to be paid. However, this option does not lower your total amount owed like debt settlement options. By offering a new loan to pay off these debts, debt consolidation groups combine the existing debts into one lump sum and essentially reduce the interest people in debt would have to pay.
Although a debtor’s obligations are consolidated into one account and paid with a single loan, the amount that is owed to the creditors remains unchanged. Also, not everyone is qualified for this program. If your account has already defaulted or you do not meet a minimum credit score, you won’t be able to enroll in this option. Other factors that could affect debt consolidation approval are monthly income, home ownership, and the type of loans you initially took out. These factors further support the best method to becoming debt free is to use a debt settlement company.
- Credit Counseling: Getting advice from a credit counselor can assist you in coming up with a plan to pay off the debt. The credit counselor evaluates a debtor’s current financial status and come up with a strategy that suits his income and preferences.
Aside from this, the counselor can also educate you in handling your finances and avoiding getting into debt again. He can offer you with a debt relief program that will fit your needs and lifestyle.
- Debt Management: In many ways, credit counseling leads to enrolling in a debt management program. A debt management adviser is a professional who will recommend a smart and doable strategy to repay the debt. This financial expert will help negotiate a new payment scheme with the creditors.
Unlike debt consolidation where you’re still required to pay the same balances, a debt management planner can ask the lender to reduce interest fees, or even lower the monthly payments. With debt consolidation, however, you will also be paying the credit counseling agency and they will be the ones to pay your creditors.
- Bankruptcy: Seen as a last resort for most, filing for bankruptcy may erase debt, but can negatively affect your credit report for up to ten years. It also has a social and professional stigma attached to it. There are two types of bankruptcies: Chapter 7 and Chapter 13. Filing for Chapter 7 is the more common of the two. Also known as “liquidation bankruptcy,” this acquires all your assets in order to pay your debts, except those covered by the exemption law in your state.
Chapter 13, meanwhile, is known as “reorganization bankruptcy.” This allows the individual filing for bankruptcy to come up with a repayment proposal that shows how the debts can be paid in a period of 3-5 years. Similar to a consolidation loan, Chapter 13 requires the repayment to be made to a bankruptcy trustee, who will then distribute the payment to the creditors. This gives the debtor a temporary reprieve from mounting debt and may save his family’s home or automobile.
These debt reduction or elimination strategies are the most popular solutions to overwhelming debt. Although each option is suitable depending on the situation, it is still best to talk to a debt relief expert to weigh your choices. By being clear about your difficulties and capabilities, you should find the best debt relief program for you.
To learn more about debt relief solutions and how to start living with financial freedom, contact CreditAssociates for a free consultation or use our Savings Estimator to see how much you could save.