You know you want to get out of debt, but you feel stuck. Your payments make it hard to make ends meet. Every time you look for a way out, though, you reach a roadblock. While getting out of debt is not easy, there are many options. You should understand each one so you can determine what’s right for you. No two people will have the same method that works for them.
Debt consolidation is something you can do on your own. It requires you to find a new loan to pay off your existing debts. You then have one payment to make each month. There are different ways you can consolidate your debt They include:
- Balance transfer credit card
- Installment loan
- Home equity loan
- Cash out refinance
The type of debt you carry determines the right option for you. For example, if your debt is entirely credit card debt, a balance transfer credit card might work. You apply for one large credit line with a low interest rate. You then transfer your existing credit cards to this card. You are left with one credit card payment each month. There’s a catch, though. If you secure a 0% APR card, you should pay your balance off before the interest starts accruing. Most cards have an introductory period where you get the 0% rate. After that, the rate adjusts to the current market rates. Paying the balance off before then saves you the most money.
If you carry secured debt, you may want to use another secured loan to pay it off. For example, a personal loan can be secured with your car or 401K account. A home equity loan or cash-out refinance is secured with your home. It usually doesn’t make sense to pay unsecured debt (credit cards) with secured debt (home equity loan). You put your assets at risk unnecessarily. Paying off secured debt with these loans is a suitable option, though.
No matter the option you take, you’ll have the same end result – one loan to pay off. Just make sure all of your creditors are paid when you take out this loan. If your new lender doesn’t pay the creditors for you, keep yourself accountable and pay them off. Don’t accidentally use the money for other purposes.
The Benefits of Debt Consolidation
One of the largest benefits of debt consolidation is the ease of making one payment. If you consolidated multiple loans, it can make your life much easier. Now you only focus on one debt. You know the payments you must make. You can also put more money towards the debt to pay it down faster.
Usually, debt consolidation means you have a lower interest rate too. This helps you pay the loan down faster. The more interest you pay, the harder it is to knock the principal down. Before you consolidate, make sure you have an interest rate that is lower than the average amongst your current debts.
Debt settlement is different from debt consolidation. It is harder on your credit. With debt settlement you often don’t pay the full balance of what you owe. Because creditors agree to write off a portion of your debt, they report it to the credit bureaus. This, of course, brings you credit score down.
You’ll need a debt settlement company to help you negotiate your debts. Before they begin, they’ll often ask you to sign a contract. They may also recommend that you stop paying your bills if you are paying them. They claim that creditors are more likely to accept a settled amount when you are in default. While you wait for your debts to go into default, you’ll pay the debt settlement agency the payments. They put your money into an escrow account. When the account reaches a specific threshold, the agency will contact your creditors. This is when they try to negotiate a reduced balanced. Once the creditor agrees, the credit agency sends them the funds. The agency will charge you a percentage of the settled amount. Usually they charge around 20%.
There’s a serious downside to debt settlement, though. Because you stop making your payments, your accounts go into default. If the creditors don’t agree to the negotiations, you are in hot water. Not only do you owe the full amount, but you are behind on your payments. You then need to catch up somehow to avoid collection activity from the creditor. The debt settlement agency must return the money they held in escrow for you, but if they settled any of your debts, they will collect their fee.
The Benefits of Debt Settlement
Debt settlement isn’t a desirable choice, but it’s often the only choice for some people. If you must opt for this choice, don’t beat yourself up. There are some definite benefits to it.
First and foremost, you’ll pay your debts off faster. Because the creditors accept a negotiated amount, you’ll pay the account off upon agreement on an amount. This usually happens within 4 years, depending on the amount you owe. Remember, you can’t settle until you have an appropriate amount of money in your escrow account. This could take time to build up. However, it’s usually less time than debt consolidation takes.
People who don’t qualify for debt consolidation often find relief with debt settlement. It’s reassuring to know that you have help. Even if your credit score will drop, you know you’ll have a fresh start. Once you pay each account off, you’ll be able to start over again. Just make sure you don’t rack up your debts all over again or you’ll end up right back where you started.
Most people choose bankruptcy as a last resort. It hurts your credit the most since it sticks around with you for 7 to 10 years. You have two options with bankruptcy – Chapter 7 and Chapter 13. Chapter 7 is liquidation. You write off most or all of your debts. In most states, you don’t lose your property or your vehicle with Chapter 7. You do, however, lose any assets, such as investments or physical objects.
A Chapter 13 bankruptcy is a restructuring of your debts. You don’t write them off. Instead, you restructure them. The trustee figures out how much you can afford each month. You then pay the trustee that amount. Once he receives the payment, he disburses the funds as necessary. This is similar to a debt consolidation except you have a court ordered trustee in charge of your finances. Any new debt you apply for will have to get the approval of the trustee before you can receive it. Most Chapter 13 plans get paid off within 3 to 5 years.
The Benefits of a Chapter 7 Bankruptcy
A Chapter 7 bankruptcy gives you peace of mind. You get to start over again. You won’t owe any of your debts unless you choose to keep it. For example, if you want to keep your home, you make your mortgage exempt from the bankruptcy. Anything you include gets discharged if the court approves it. It’s all done at once. You then wipe the slate clean and start over again. You don’t owe any creditors any fees or anything. The only fees you’ll pay are your lawyer and court fees.
The Benefits of a Chapter 13 Bankruptcy
Just like debt consolidation, Chapter 13 bankruptcy helps alleviate some stress. You have help in getting your debts paid off. You don’t write anything off, but instead, you pay them honestly. There is less damage to your credit score with this method. But, it can stick with you for up to 10 years. Lenders often look at Chapter 13 bankruptcies as less damaging because you made good on your debts. You just needed some help.
What are the Best Options?
Because there are so many scenarios, only you know which options are right for you. We suggest starting with debt consolidation. Can you make it work? You can do it on your own or with a credit counselor. Just make sure you look closely at the fees. Know what you are paying and how long it will take you to pay your debts off. Look at the type of debts you carry and if you can afford to pay them off with one loan payment. Talk to several lenders and see what is available for you.
If you can’t make debt consolidation work, look at the pros and cons of debt settlement and bankruptcy. Both options damage your credit. It’s up to you to fix it. Once you wipe the slate clean, you must pick up the pieces. Pay your bills on time, don’t overextend yourself financially, and don’t apply for too much credit. If you can show lenders you can be financially responsible, you can put the days of debt settlement or bankruptcy behind you.
If you are not sure which option is right, talk to a credit counselor. They can take an objective look at your finances and figure out what will work for you. No matter which option you choose, you’ll get yourself out of debt. It is up to you to start off on the right foot then.