Mapping out Debt Relief Plans

Charting Your Way to Debt Relief

Every debt relief plan takes you to the same destination, but in a different way. The route is different. So is the shape that you are in when you arrive.

Debt relief plans need to be followed to completion, or they won't succeed. When you're in good financial shape overall, your debt relief plan is simple. The sailing is smooth; you can chart the easiest and fastest course. When your financial situation is less stable, you have to map out a longer, more risky debt relief plan.

Basic Provisions

There are some items you need to take with you, no matter which way you travel. You need clothes, luggage, and some money, regardless of whether you are traveling first class or taking the long, slow route.

When you're working on a debt relief plan, you need to start with the following basic items, regardless of your financial situation:

1. Budget- You have to keep track of your income, expenses (your monthly expenses and also the ones that occur periodically), your debts, and your required payments, to increase your chances of your debt relief plan succeeding. Use the Bills.com free budget guide as a starting place.
2. Control Spending- Whether you are swamped with debt and are struggling to make payments or if you are making good money and putting a plan into place to pay off debt, you need to control your spending. For some, that means cutting out all discretionary spending. For others, the changes are less drastic; it may mean only trimming a few items. You can see how much money you can save, by making only some small changes in your spending habits, by using the Bills.com Savings Machine

Smooth Sailing: Do-it-Yourself Debt Relief

If your basic finances are in good shape, but you are working to pay off your debt more effectively, you'll benefit from simple, common-sense debt relief advice. You can employ the following do-it-yourself techniques:

1. Increase Debt Payments- Putting more money towards your debt is the key to getting out of debt faster. If you're carrying balances from month-to-month, the more you can put towards the principal balance the faster you become debt free. Commit to paying a certain amount each month and keep paying that amount, even as you pay off your creditors one by one. There are two simple strategies you can use, to pay off your debts more effectively:
   • Avalanche- Pay off your debts in order, from the highest interest debt down to the lowest.
   • Snowball- Pay your debts from smallest to largest. Start paying off the smallest debt first, so you get the boost of eliminating one of your debts and increase the momentum of your debt relief plan.
2. Lower Your Interest Rates- If you have a good history with your creditors, call them up and ask for an interest rate reduction. A lower rate means that more of your monthly payment goes to pay off your principal.

Airplane Ride: Loan Consolidation

If your credit is "first class," look into two debt relief plans available only to people with excellent credit.

1. Cash-out Refinance- If you have equity in your home, consolidate your debt with a cash-out refi. Pay off your high interest debt and get the lowest interest rates available for long term financing.
2. Balance Transfer- Move high interest credit card debt to a 0% or low-interest card. Balance transfer low rates adjust after an introductory period, so work hard to pay down as much of your principal as you can while your rate is low. If you pay as agreed and keep your credit in good standing, you may be able to take advantage of one balance transfer after another until you pay off all your debt.

Both these plans will help you achieve debt relief, in a relatively short time, as long as you are careful not to run up more debt.

Long, Slow Trip: Professional Debt Relief Plans

Some debt relief plans take years of disciplined effort to work. If you need professional debt relief assistance, be prepared to stick to a monthly payment plan and restricted use of credit for a number of years. Still, slow and steady can win the race, getting you out of debt, if you stay in the program to completion.

Slow Train Ride: Credit Counseling

Consumer Credit Counseling takes about five years to complete. A new payment plan is worked out by the credit counseling service, with lower interest rates on your debts and maybe some of your late or over limit fees waived. Your monthly payment is usually about 3% of your total debt enrolled, which is comparable to your monthly minimum payments. About 3 out of every 4 credit counseling clients drop out, mostly because they can't afford the monthly payment. However, if you hop aboard the CCCS train and make your monthly payments, you will reach debt freedom.

Car Ride on a Bumpy Road: Debt Settlement

Debt Settlement takes about two to four years to complete. The positives are that you avoid bankruptcy and have the lowest overall costs and lowest monthly payment of any debt relief plan. The negatives are that your credit is harmed and that you are subject to collection calls and creditor threats and actions. Only a small percentage of accounts enrolled in debt settlement end up in a lawsuit, but the program is not without risks. If you stick with the plan, you'll end up debt free, with more money in your pocket, but it is not always a comfortable trip.

Long Hike Through the Desert: Chapter 13 Bankruptcy

If you can't pay your creditors and you're facing aggressive collection efforts, such as a wage garnishment, filing for Chapter 13 bankruptcy is an option. In Chapter 13 you repay your creditors under a plan that is supervised by the court. Creditors are bound by the agreement that the court orders and must stop all collection efforts during the process.

It takes about five years to complete, generally, and can be a long, difficult process. You have to pay your debts from your disposable income, the amount that is left over after you pay only what the court decides is reasonable for your housing, food and clothing, transportation, etc. The court's expense allowances are not generous. Every other dollar you earn goes towards repaying your debts.

Additionally, bankruptcy harms your credit severely, remaining as a public record on your credit report for 10 years.

Shot Out of a Cannon: Chapter 7 Bankruptcy

A Chapter 7 can get rid of your debts faster than any other options, but it is difficult to qualify for and has extreme consequences. You will lose your property that is not protected by the limited exemptions in place in your state. This can mean the loss of a home, selling your car, and forfeiting savings in the bank.

A Chapter 7 can be the best way to get a fresh start, when you are under extreme financial pressure and lack income and assets, but, because of its negative consequences, it is viewed as the option of last resort.

How You Look When You Arrive

Your goal was to choose a debt relief plan to get you out of debt in the best way possible. The different plans get you to debt freedom. All can get you there. However, how you look when the journey is done depends on how you traveled.

If you started off in good shape and could travel the easy route, you arrive no worse for the wear. Your credit is in good shape and you can focus on building savings and wealth.

If you had to take a more tortuous route, you need to work on repairing your credit and making sure that you don't repeat the steps that caused you to get into debt in the first place. Maintain the discipline you established while working through your debt relief plan and use the good habits you've practiced to accomplish your future financial goals.