If you’re struggling with debt, it may be time to consider debt relief. These programs can help you get out of debt more quickly and avoid bankruptcy altogether.
Debt-relief options include credit counseling, debt consolidation, and debt management. Each solution offers a slightly different approach to getting out of debt.
Credit counseling, a free service offered by nonprofit agencies, can help you deal with debt problems and set up a budget and payment plan. Counselors are trained and drp certified in consumer credit, money and debt management, and budgeting.
When you enroll in a debt management program, your counselor will work with your creditors to create a payment plan that you can stick with. This plan typically focuses on credit card accounts and personal loans.
However, it should be noted that this plan will negatively impact your credit score, if you don’t make payments on time. It can also reduce the amount of available credit you have, known as your utilization ratio.
Before you decide to use a credit counselor, it’s important to do your research and find one that has your best interests at heart. Check with your local consumer protection agency or university, as well as friends and family for recommendations.
Debt consolidation is a popular way to pay off debts. This method consists of taking out one loan to pay off multiple loans, which can reduce your total interest payments and save you money over time.
If you’re considering debt consolidation, be sure to make a budget and stick to it. This will help you avoid relapsing into bad debt habits after you get out of debt.
Similarly, be sure to make your new monthly debt payment on time. If you miss a payment, you’ll likely incur late fees and lower your credit score.
A debt consolidation loan can be a helpful tool, but you need to choose the right one for your needs. Look for a loan with a low interest rate, a longer repayment term and a fixed monthly payment.
Debt Management Programs
Debt management programs, also known as debt repayment plans (DMPs), are one option for getting out of debt. They are designed to make debt payments affordable and help consumers pay off their debt in 3-5 years.
Credit counseling agencies that offer DMPs have trained and certified credit counselors who will analyze your financial situation and design a plan that meets your needs. Then, they will negotiate with your creditors to reduce interest rates and increase the time to repay your debts.
While there are some fees associated with these programs, the charges are usually far less than the interest you will save. You may be eligible for fee waivers based on your income and state regulations.
Debt settlement is a debt relief option that can help you reduce your overall debts in exchange for a lump sum payment. Typically, this type of debt relief is available only for unsecured debts, such as credit cards and medical bills.
In this process, a company will contact your creditors on your behalf and make a proposal to settle the debt for less than what you owe. The company may also instruct you to stop making payments while they negotiate.
In most cases, a settlement offers you more savings than the fees you pay to the settlement company. However, there are several risks that can arise during the debt settlement process. For instance, your credit may drop and you could be charged late fees or interest from the creditor.
Bankruptcy is a legal process that can help people get relief from some or all of their debts. It can also help businesses resolve their debts and start fresh.
You may consider filing for bankruptcy if your total non-mortgage debt is more than 40% of your income and your path to pay it off is unclear. This is usually the case for individuals who have credit card, student loan or auto debt.
You can file for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code. If you qualify under the statutory “means test,” this type of bankruptcy will not affect your credit.