If you are drowning in credit card debt or high interest payments, chances are, a debt relief program may be a great option for alleviating your financial stresses.
Three Kinds of Debt Relief
When it comes to debt relief options, there are threeviable pathsutilized by consumers in order to tackle your debt and better manage your budget.
Debt Relief Programs
With debt settlement, a debt relief agency will work on your behalf in order to convince your debtors to take a settlement for less than what your current balance is. The debt relief company establishes a term repayment with your creditors which allows you some flexibility regarding repayment and is typically able to reduce a substantial amount from the principal amount you owe. With a reduced settlement, you are provided with payment relief and can begin saving money from your high interest credit card debt. For example, clients enrolled in a debt relief program typically payback only 65% to 75% of their total registered debt amount, upon successful completion of the program. So, for example, if you had $30,000 in unsecured debt, that means you would payback just $19,500 to $22,500. This does however depend on the fees the company charges, the best debt relief companies will only charge 20% in fees.
While the settlement process is occurring, the debt relief company will typically explain that you must close out the associated credit card accounts you include in the program and stop making minimum payments as you would normally do. During this time late fees and interest will accrue and your credit score will be negatively affected. However, any reputable debt relief company will explain that all of the above is to be expected and it should already be factored into your payoff.
Many debt settlement companies typically charge an advanced fee for their debt relief options. If this is the case you should steer clear of these types of companies. All honest and reputable settlement companies will not charge you any upfront fees! The issue with debt settlement companies that charge upfront fees is that they are not incentivized to save you as much money as possible. If your program is unsuccessful and you do not save as much money as they quoted, they will still have profited so they don’t care much for your well-being.Also, beware of companies that promise an extremely lengthy repayment period (a two to four-year payoff is typically the recommended term length for these options).
Always carefully review your options before enrolling in a debt relief program as there are some bad actors in the debt relief industry. Also, keep in mind that there is a chance that an inexperience debt relief company may night provide the best savings possible. Always, make sure you are working with experience debt experts and the best debt relief company!
Debt Management Plans
If you are struggling with high interest credit card payments and finding that interest is encumbering your ability to make progress on your debt obligations, credit counseling (aka debt management) may be a suitable option for you.Debt management programs arerunby credit counselors which have the ability to aid consumers in acquiring lower interest rates.When granted access to your financials, a certified credit counselor will review an income and expense analysis with you and use any leftover funds at the end of each monthtonegotiate lower interest rates with your creditors. However, every month you will be required to pay monthly fees to the management company which will inevitably eat away at your interest savings. This is often overlooked!Although, they can lower your interest rates, at the end of the day, you are not provided with very much payment relief since their fees tend to eat away at your savings.
However, the debt management program (DMP) will not adversely affect your credit score. Although, this is viewed as a positive, these debt management programs typically will not provide a client with much savings in comparison to other debt relief options. Moreover, on your credit report you may see notations that you were in a credit counseling program.
If you have exhausted all other debt relief options and still feel you haven’t found the best option for you, your last resort is going to be bankruptcy. Bankruptcy should be your last recourseat all costs since there are many negative ramifications consumers will experience when they file for bankruptcy.
When you file for bankruptcy, a bankruptcy court in the United Stateswill evaluate and scrutinize your financialhealth and overturn every stone available to them. If you qualify for a traditional chapter 7 bankruptcy and pass the means test then you will be free of any liabilities you owe to your debtors. However, if you cannot qualify for a Chapter 7 then you will only be eligible for a Chapter 13 (which is very similar to a debt settlement program except it has more negative ramifications).
However, if you qualify, all of your debt will be dismissed under the court order and you will not have to pay back what you owe (except possible tax savings). You won’t receive anymore hassling phone calls or letters from creditors but you will also have to start from the beginning in regards to your finances and credit worthiness.
Three Times You Shouldn’t Pursue Debt Relief
There are many instances in which debt relief may not be the right solution to get you out of a financial bind. If you are looking to purchase a home and acquire a mortgage in the short-term debt relief is probably something that should wait. The reason being is that you will want the highest credit score possible if you are looking to acquire a home mortgage. Here are 3 instances in which debt relief may not be the best option for you at this exact moment in your life.
You Need Good Credit in the Short Term
If you will be utilizing your credit for something in the near-term future, it will always be recommended that you make use of those credit opportunities before pursuing any debt relief options that may negatively affect your credit worthiness. Most examples include purchasing a home, acquiring a significant auto loan, second mortgage, refinancing loans, procuring business loans, etc. Before deciding on an option that may negatively affect your credit it is always advised that you make use of your credit before enrolling in any specific debt relief option.
You Can Repay BackYour DebtWithin 2Years
If you can payback the amount of debt you owe quite easily (within a two-year time frame) you should really clamp down and do your best to budget so that you can payback all your associated debts without the use of any debt relief options. Two years is not a very long-time frame and although it will take a good deal of effort, if it’s something you feel you can do with minimal effort you should definitely try to repay everything on your own. If it aids in your decision-making process you should consider reaching out to a financial planner and doing extensive research on how to implement the debt snowball method.
You Have a Security Clearance
If you are currently employed by a company or within an industry that has vigorous compliance requirements or security clearance for its employees, it is advised that you first check with management to make sure any of the above options are allowed by your employer. The last thing you want is to move forward an option and unknowingly lose employment due to security clearance. Often times, these debt relief options are not seen as an issue because your employer will tend to view the above options as an attempt to resolve your financial qualms and better your finances overall (but you should always be safe and check with management first). As long as your get the okay from management you should be free and clear to move forward with any of the above debt relief options.