This year’s unique financial challenges call for creative solutions. When it comes to growing debts, you need a debt management plan. These can provide a clear path to financial freedom.
If you’re overwhelmed with high interest and struggling to make timely payments, it might be time to explore the benefits of debt relief options.
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What are Debt Relief Programs
Debt Relief Programs help you make the payments you can actually afford while reducing and possibly eliminating the debt owed. Debt relief options include credit counseling or a debt management program, debt consolidation, settlement, and bankruptcy.
The safest and most reliable option for controlling your spending habits is a debt management plan. This option involves the help of a credit counseling agency or credit counselor to create a payment plan within a realistic budget.
The following options carry more risk. A debt consolidation program typically involves a lump sum loan that clears your total debt balance from multiple creditors. The biggest benefit of debt consolidation is the much less stress of dealing with just one creditor.
Next is debt settlement, which is done by a company on your behalf to settle a debt that is less than what you actually owe. It does not carry any collateral, as lenders have no obligation to pay.
Debt settlement also damages your credit report for seven years. As such, it is less preferable than other solutions and should be approached with caution.
Finally, declaring bankruptcy is the last and least desired debt management plan by debtors and creditors. Bankruptcy means that you have declared yourself totally incapable of paying your debts. It involves a bankruptcy court and can cause you to lose assets to help pay your creditors.
While bankruptcy can offer a fresh start, it has a dramatic effect on your credit report and affects your access to credit, insurance, job prospects, and even a place to live. Details of bankruptcy such as the filing date and the later date of discharge will stain your report for ten years.
Debt Consolidation Programs
Having multiple loans that you can’t keep up with and pay off on time can be very stressful. If you have a good credit rating and a stable source of income, then debt consolidation might be the best debt management plan for you.
The goal of debt consolidation is to remove high interest debt and reduce it to a single monthly payment. Note that only unsecured debts like credit card debt and personal loans are covered. Secured debts for cars and homes, as well as student loans, are not covered.
Debt consolidation can take the form of a new loan that can erase your original loan balances. It can also take the form of a debt consolidation program where you make a one-time monthly payment to the credit counseling agency who will then make the payments to your various creditors.
The credit counseling agency works cooperatively with your creditors and will likely be able to ask them for concessions to reduce interest rates and monthly payments. They may also request an “aging” of your account to mark it as up to date and avoid late fees, potentially improving your credit score.
What is debt consolidation
A debt consolidation loan and debt consolidation program work the same way. Both require you to make a single payment instead of multiple monthly payments. Either debt management plan will likely result in lower monthly payments as well. However, it may take longer to clear your debt, and you could end up paying more interest during the repayment period.
You need to do your research to make sure that the interest rate on a debt consolidation loan is lower than the average interest rate on your other debts combined. Otherwise, this debt management plan won’t help you pay off your debt faster.
Credit card companies usually close your account after you enroll in a debt consolidation program. This forces you to live without a credit card during this time and avoid additional debt. Your creditors will see any new obligations on your credit report and can withdraw any concessions made.
How to consolidate debt
There are many non-profit organizations that can provide you with a debt management plan. It is advisable to check with the National Foundation for Credit Counseling first and consult with certified counselors before committing to a consolidation plan.
A debt management plan with a nonprofit credit counseling agency will always involve a registration fee and monthly fee. However, these are generally lower as an overall cost. Also, since these agencies can usually offer you reduced interest rates, it means you can become debt free at a much faster rate.
A debt management plan typically lasts 36 to 60 months.
Debt settlement as a debt management plan is much riskier than debt consolidation. Regulations can actually reduce a borrower’s credit score by 65 or even 125 points. Some debt settlement companies often accumulate your money in their accounts and wait until it is large enough to make a settlement offer with your creditors.
This means that your debts will go unpaid for an uncertain period. A single missed or late payment can result in a negative credit score. This mark will stay on your credit history for up to seven years.
Is debt settlement really worth it
There are many drawbacks to debt settlement. Some of them include the prevalence of fraudulent debt relief companies who prey on desperate debtors. Also, beware of advertisements that claim risk-free debt settlement. These can involve filing for bankruptcy which in the majority of cases is not the best debt management plan.
Finally, protect yourself from any business that charges upfront fees. Debt relief companies cannot accept payment until they can prove that your debt has been settled. Otherwise, they are in violation of federal law and should be reported to authorities.