Carrying a large amount of debt can be debilitating, especially if it is more than you can easily handle. It can overshadow all other financial priorities in your life. The good news is that there are many debt relief programs that can help you deal with overwhelming debt.
What is Debt Relief?
Debt relief is a strategy aimed at resolving or managing a large amount of personal debt. It involves working with your creditors to create a plan to repay your debt in a way that satisfies them, stops the phone calls from collectors, and avoids long-term damage to your credit. Ultimately, it’s a way to reduce stress and make your debt more manageable.
When Should You Consider Debt Relief?
It isn’t always easy to determine when you need help managing debt. But there are some common signs that may indicate you’re in trouble:
- Your debt-to-income ratio is too high: The amount of your gross income that goes toward debt repayment each month is an important number for lenders. Most mortgage lenders won’t give you new credit if your debt payments exceed 43% of your monthly income.
- You can’t control your credit usage: Credit utilization measures your total credit card debt against your available credit limit and accounts for 30% of your credit score. If you are consistently spending more than 30% of your credit limit, your credit score will be affected, which will make it harder for you to obtain loans on favorable terms.
- You are paying off your credit cards with other credit cards: It’s fine to transfer balances between cards strategically, but if you can’t manage your payments without opening new cards, you may be in trouble.
If you feel overwhelmed by debt and it’s causing significant financial or emotional stress in your life, it may be time to ask for help.
Types of Debt Relief Programs
If you decide to seek help, there are several options for how to handle your debt.
Debt Consolidation Loans
A debt consolidation loan is a type of personal loan that you can use to combine multiple debts into one balance. The benefit of this is that you will end up with one monthly payment, making it easier to stick to a debt repayment plan and include your debt payment in your monthly budget. A debt relief program can help you determine if a consolidation loan is a good fit for your situation.
Be aware that you can use your home as collateral to consolidate your debt through a mortgage or a home equity line of credit.
Your credit score may drop in the short term when a new loan is added to your credit report as part of this process. However, your score will gradually improve over the coming months, provided that you make your payments on time and avoid adding more debt.
Before you sign on the dotted line, make sure to read the loan terms, including the interest rate, repayment period, and any fees. Interest rates for debt consolidation loans range from around 6% to nearly 36%.
Debt Management Programs
A debt management program facilitated by a nonprofit credit counselor is another option. A credit counselor will help you organize your finances and assist you in developing a plan to repay debts if you really need it. They may help you negotiate with your creditors for better rates or extended repayment terms.
Credit counseling can provide some of the calculation and structuring needed for your debt relief program. Be sure to ask about any fees before you get started. If their fees will add to your financial burden, or if they earn money by referring you to other services, be wary of that organization. Additionally, ensure that your counselor belongs to a certified nonprofit organization and that they are not exclusively paid for debt consolidation plans as the only option for debt relief.
Note:
Working with a non-profit credit counselor – even when it involves a debt management program – typically will not impact your credit score unless you have negotiated a settlement. You may see a slight impact from closing accounts, but your score will recover over time.
Debt Settlement Programs
Debt settlement companies are another type of debt relief program that should generally be avoided. These companies collect payments from you monthly and hold the money in an account. Once a certain amount has accumulated, the debt settlement company contacts your creditors to negotiate a settlement for your account.
Under debt settlement, you may pay costly service fees and suffer damage to your credit score if you follow the advice to stop paying on accounts that are in good standing. There is no guarantee that the debt settlement company will be able to reach an agreement with your creditors. If you have accounts that are past due or in collections, you can negotiate a settlement yourself without paying a third party.
Balance Transfer Credit Cards
If a large portion of your debt consists of credit card debt, a balance transfer card may be the best way to eliminate credit debt. Having a large amount of credit card debt usually means you are paying a lot of interest, as the average annual interest rate for credit cards is just over 20%. This is especially true if you are only paying the minimum on your card.
Transferring your credit card debt to a low or zero-interest balance transfer credit card is a good way to start paying down your balances. Be aware that most balance transfers come with fees, usually a small percentage of the amount transferred, and that the promotional interest rate lasts for a limited time.
To get the most out of your balance transfer, you should pay off the transferred balance before the promotional interest period ends. Additionally, you should avoid accruing new debt on top of the transferred debt.
Filing for Bankruptcy
After struggling with debt for a while, bankruptcy may sometimes seem like the best option. After all, it will eliminate your debt and allow you to start fresh. However, bankruptcy can have long-lasting effects on your financial situation and credit. Not only can bankruptcy cause your credit score to drop significantly, but it will remain on your financial record for up to 10 years. This typically means it will take some time to qualify for new loans or obtain favorable terms.
There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy wipes out all your debts but involves liquidating your other assets, except for some exempt properties. The proceeds then go towards your debts. With Chapter 13, your debts are repaid through a repayment plan that lasts from three to five years, which is usually strict and needs to be approved in bankruptcy court. Bankruptcy can be costly as you may need to hire an attorney to help you file.
Note: Bankruptcy should be the last option when considering debt relief options. Always talk to an attorney to discuss all of your options before taking this path.
Conclusion
Although your debt may seem overwhelming, choosing a debt relief option can help you take control of your financial situation.
Regardless of which option you choose, be sure to understand all the terms and your ability to afford the new payments. Don’t neglect other areas of your financial life – creating a budget and building an emergency fund protects you from other debt problems and establishes a healthy financial foundation.
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Resources:
- American Psychological Association. “Coping with Financial Stress”.
- FICO. “What are Outstanding Amounts?”.
- Consumer Financial Protection Bureau. “What is Credit Counseling?”.
- Consumer Financial Protection Bureau. “What are Debt Settlement / Debt Relief Services and Should I Use Them?”.
- myFico. “What are the Different Types of Bankruptcy and How is Each Viewed by My Credit Score?”.
Source: https://www.thebalancemoney.com/where-to-find-debt-relief-programs-4693739
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