Being responsible with money doesn’t come naturally to everyone. Mistakes are made, especially early on in life. That could include overextending yourself when it comes to purchases made on credit, missed or late payments causing your interest rates to go up, and ignoring missteps to the point they get you deep into debt.
Additionally, things like a medical emergency, loss of employment, or other unexpected financial event can take a toll on your finances.
When debt becomes too much to handle, the idea of dealing with it can be overwhelming. However, there are several options for debt relief that can lend a necessary hand in correcting the course of your financial life.
Here are five common debt relief options to help you overcome substantial debt.
1. Debt Consolidation
When you find yourself drowning in debt from credit cards, loans, or otherwise, debt consolidation can be a practical solution to get your financial situation back under control.
With debt consolidation, you typically transfer all your balances to a new loan or single credit card to pay off as many outstanding debts as possible. Then pay as much as possible each month to that one account instead of trying to manage a bunch of them simultaneously.
Ideally, you would transfer them to a low-interest-rate personal loan, credit card, or other line of credit that’s lower on average than what you currently pay throughout your accounts. However, that’s not always possible and doesn’t necessarily mean you shouldn’t consolidate anyway.
Sometimes we must make choices based on our known money management habits and choose the path where we’re most likely to succeed.
– Consolidating Debt with a Credit Card
Using a credit card to combine debt can be a struggle for a lot of people. They typically come with a variable interest rate, a revolving credit line, and an annual fee. That means you’ll have to commit to paying more than the minimum payment each month and not continue spending on it if you want your balance to go down.
You’ll also have to force yourself not to use credit as it becomes available. Then, even if you are successful, your interest rate could increase along with the monthly payment needed to pay it off by your target date. A home equity line of credit, or HELOC, falls into this category too.
– Consolidating Debt with a Loan
A debt consolidation loan can be a better solution for people struggling to manage their credit cards and other debt. Most debt consolidation loans are just personal loans used to consolidate debt. However, you can also refinance your home and take cash out, obtain a home equity loan, or borrow money elsewhere to pay off your other balances.
The benefits of taking this route toward debt relief typically include a fixed interest rate and monthly payment, a precise payoff date, and the inability to reuse the credit. Instead of paying multiple debts with varied fees every month, you can make one payment to your new consolidation loan.
With either method, the sooner you begin the process the better. If your debt and credit score continue spiraling out of control, there will be a point where it will be nearly impossible to consolidate your debt on your own.
2. Credit Counseling
If you continue struggling to manage your debt on your own another option is to seek the help of an approved credit counselor. A reputable credit counselor can help you create a personalized financial plan and budget based on your goals, income, and needs.
Certified credit counselors can help with debt collection, budgeting, credit report review, financial education, bankruptcy, and housing. Look for government programs, non-profit agencies, and for-profit companies accredited by organizations such as the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
The best credit counseling organizations will offer an initial consultation and assessment for free, then only suggest paid solutions such as a long-term debt management plan, debt consolidation, or additional counseling as needed.
3. Debt Management Plan
Under this type of debt relief, an experienced credit counselor works to develop a repayment plan with your creditors. That typically includes reducing interest charges during the repayment period, and just one monthly payment to the credit counseling agency.
Unlike debt settlement, which requires you to be behind on some or all of your payment obligations, debt management plans allow you to maintain on-time payments before further dinging your credit. However, you will likely be required to close your credit lines when enrolling into a debt management plan which could temporarily lower your credit score.
Any unsecured debts, those that are not attached to assets like your vehicle or your home may be eligible for a debt management plan. While you still agree to repay your debts in full, the reprieve from interest works to lower the total cost of debt over time, making payments easier to manage.
Working with a professional on your debt management plan often requires an initiation fee and carries a monthly fee, so it is important to understand the total cost of this choice before signing up.
4. Debt Settlement
Depending on your situation, debt settlement may also be a viable selection for debt relief. Also referred to as debt negotiation or resolution, settling debt requires you, or a professional such as CuraDebt or National Debt Relief, to negotiate a lower monthly or lump-sum payment with each of your creditors. Negotiating debt down through settlement allows you to reduce the total amount of money owed and create a plan to eliminate the debt in a shorter time.
Hiring a professional to settle your outstanding debts is often a smart choice given their experience dealing with creditors on a client’s behalf. Top companies can even get some of your debts immediately dismissed with a cash reward back to you. Their legal professionals can identify law violations committed by institutions and exploit those infractions to your benefit.
Working with a debt settlement company often costs money, so it is important to weigh the pros and cons of this option and alternatives before taking this step. Most debt settlement businesses will offer a free initial consultation and charge a commission when you sign up for their program. You can also try to settle your debt on your own for free.
5. Bankruptcy
The last resort in finding debt relief for individuals and married couples is filing bankruptcy under either Chapter 7 or Chapter 13. With Chapter 7 bankruptcy, you work with the courts to absolve yourself of all eligible debts, wiping the slate clean; under Chapter 13 bankruptcy, you create a years-long repayment plan that eases your total debt obligation.
Bankruptcy will remain a blemish on your credit history for up to 10 years, making it an option generally reserved for those who are seriously delinquent. It’s ideal for those who see no feasible alternative. However, you can start rebuilding your credit immediately following bankruptcy and even get approved for a personal loan, auto loan, home mortgage, credit card, and other types of credit shortly afterward. It can be a fresh start.
Both bankruptcy options are best worked out with the help of an experienced attorney and could take a substantial amount of time to complete depending on the complexity of your situation.
Final Thoughts on Getting Relief from Substantial Debt
Debt shouldn’t consume your life to the point you have a mental breakdown. Instead, you can utilize one of these debt relief options to ease your mental health and the burden debt payments have on your finances.
Before taking a drastic step toward debt relief, take the time to reflect on your financial history, and commit to doing things differently moving forward. The only way any of these options will benefit you going forward is if you’ve dedicated yourself to a life of better financial responsibility.