If you want to pay off your debts, you need to make some tough decisions. The first of these decisions is choosing the debt repayment option you will follow. Each option has its advantages and disadvantages, and the best choice for you depends on your debts, income, monthly expenses, the importance of your credit rating, and the amount of debt you wish to pay off. Here are six debt repayment options you can consider.
01 of 06: Paying Off Debts Yourself
Paying off debts yourself involves assessing your debts and creating a plan to repay your debts and making that plan work. You may need to contact your creditors and lenders to negotiate a payment schedule or request a lower interest rate. If you go this route, you are responsible for making monthly payments to all your creditors. How and when you repay the debts is up to you. Your debt repayment plan will include both secured and unsecured debts.
02 of 06: Consumer Credit Counseling
A credit counseling agency typically works within your budget to set up a reasonable monthly payment plan for all your unsecured debts. The credit counseling agency will create a Debt Management Plan (DMP) for you, which usually includes a lower minimum payment for both your creditors and a lower interest rate. Credit counseling with a DMP usually takes three to five years, depending on how much debt you have.
Note that you are not allowed to use your credit cards while in a DMP program. Although your credit report will be updated to show that you are in credit counseling, it will not impact your credit score.
03 of 06: Debt Consolidation
Debt consolidation involves combining all your debts into one monthly payment. Some types of debt consolidation programs involve taking out a new loan to consolidate your unsecured debts. You will need to have a good enough credit score to obtain a new loan. Other programs work more similarly to consumer credit counseling by consolidating the monthly payment while keeping all your current loans.
04 of 06: Debt Settlement
If you work with a debt settlement company, you will pay a monthly fee to the debt settlement company, which negotiates a payment amount that is less than the full amount you owe. When an agreement is reached on the settlement amount, the debt settlement company uses the money you have been sending to pay the settlement.
Debt settlement requires you to be delinquent on your payments to qualify. There is also no guarantee that your creditors and debt collectors will accept the settlement offer. You may receive a refund or may not receive a refund if the settlement is unsuccessful. Also, remember that the average settlement percentage is 78%, according to the American Fair Credit Council. When you consider that you may have to pay taxes on the forgiven debt, the savings may not be substantial.
05 of 06: Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a way to obtain relief from all or some of your unsecured debts. You will have to pass a means test and undergo credit counseling to show that you do not earn enough money to repay your debts on your own. Depending on the laws in your state, you may have to forfeit some of your assets to pay off certain debts. Most of your unsecured debts can be discharged or eliminated in bankruptcy. However, child support, tax debts, and student loans cannot be discharged.
06 of 06: Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a type of bankruptcy that allows you to repay your debts over three to five years. Any debt remaining after completing Chapter 13 bankruptcy may be settled. You may file for Chapter 13 bankruptcy when you earn too much money to file for Chapter 7 or when you have assets you want to keep. You will also need to undergo credit counseling to file for Chapter 13. In Chapter 13, you must pay child support, alimony, certain tax debts, any wages owed to employees, and regular payments for your home and vehicle, as well as any overdue payments you have on your home and vehicle.
Source:
https://www.thebalancemoney.com/six-debt-repayment-options-960866
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