- Learn about debt resolution.
- Compare different options for resolving debt.
- Understand the pluses and minuses of each approach to resolving debt.
What are all of the pros and cons of each debt resolution or debt consolidation option?
What are all of the pros and cons of each debt resolution or debt consolidation option? How will each affect my credit report?
There are a variety of debt resolution options available.
To find the right one, you need to carefully weigh why you got into debt.
You also need to understand how each debt resolution option works, so you can find the solution that's right for you.
When comparing different options, pay attention to:
- The size of the required monthly payment
- How long it takes to become debt free
- The total costs to pay off all your debt.
- How your credit rating is affected
Credit counseling is a very common form of debt consolidation. There are many different companies that offer credit counseling services.
A credit counseling agency will often be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. Because the main benefit of the program is reduced interest rates, it less effective if your interest rates are already low.
In a credit counseling program, you are still repaying 100% of your debts, plus interest, though your monthly payments should be lower.
On average, most credit counseling programs take around five years.
While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy. It is, after all, using a third party to re-organize your debts.
Debt settlement, also called debt negotiation, is designed for people with a serious financial hardship. The hardship makes it so they either cannot pay their bills or are about to start falling behind.
Monthly payments in a debt settlement program will be lower than in credit counseling and usually far lower than what you're paying each month in required minimum payments to your creditors.
Debt Settlement programs typically run around three years. Keep in mind that during the your debt settlement program, you are not paying your creditors.
This means that a debt settlement solution of debt consolidation negatively impacts your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program.
However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. Debt settlement cuts your total debt, sometimes by over 50%.
The biggest trade-off in debt settlement is accepting a negative credit rating, for a period of time, versus saving money.
Many people think first of a debt consolidation loan when seeking debt consolidation.
In a debt consolidation loan, you exchange one loan for another, usually with the goal of a lower monthly payment or lower costs over the life of the loan.
You may take out a secured consolidation loan, refinancing your primary mortgage or taking out a second mortgage or home equity line of credit. A cash-out refinance which carries a lower interest rate and is tax deductible can be a smart way to pay off high interest rate credit card debt.
It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation. If there is ever a time that you can't afford the new mortgage payment, you put yourself at risk of foreclosure!
Unsecured debt consolidation loans are another option. Rates are generally far higher than on a secured loan. Shop for unsecured debt consolidation loans at banks, credit unions, or peer-to-peer lenders. Contact multiple lenders, to comparison shop for the best deal.
The rates you'll find on unsecured loans are primarily based on your credit score. You need an excellent credit score, over 740, to get the best rates.
If your credit is not excellent, but is improving and you're having trouble finding a loan, speak with one of the consultants at FreedomPlus.
Bankruptcy may solve your debt problems. It is a severe option, but is the best option for some people.
A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort.Since bankruptcy reform went into effect, it is much harder to file for bankruptcy chapter 7.
You may only qualify for a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, your debts are reorganized. The debts are repaid, according to the terms established by the bankruptcy court. Chapter 13 bankruptcies usually run three to five years.
If you are considering bankruptcy, I encourage you to consult with a qualified bankruptcy attorney in your area.
You may be curious what may happen if you do just stop paying your creditors and take no other action. If you stop paying your unsecured debts, creditors have the right to collect the debt.
First, you will likely receive collection calls and letters directly from your creditors. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.
Third-party collectors are known to be much more aggressive in their collection tactics than original creditors. Don't be surprised if the collection calls become more persistent, or even threatening.
Thankfully, the Fair Debt Collections Practices Act has rules governing the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules.
In some cases, when all other collection efforts fail, a creditor will decide to sue you. This is not a frequent occurrence, but it is within a creditor's rights and is a possibility about which you should be aware. If one of your creditors sues you for a debt you defaulted on, the court will likely issue a judgment in the creditor's favor.
Depending on your state's laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, place a lien on your property, or take other action to enforce its judgment.
Regarding a credit report, default damages a credit score severely. In addition, default is a warning flag for many lenders, who will refuse to deal with a potential customer with a default on their record. As a result doing nothing and allowing default is a poor option for most consumers.
There are many forms of debt consolidation, Each consumer is different, so find the debt consolidation option that fits for you.
Here are some fast tips for your own quick Debt Consolidation Evaluator:
1. Look at consolidating debt in a mortgage refinance, if you have strong credit and have equity in your home.
2. If your primary debt problem is high interest on your credit cards and you can afford a to pay about 3 percent of your total debt each month consider Credit Counseling.
3. Consider debt settlement if you want the lowest monthly payment, to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections .
4. Seek a bankruptcy consultation, if you can't meet your monthly payments and can only afford less than 1.5 percent of your total debt each month.
Bills.com makes it easy for you to apply for debt relief help.
I hope this information helps you Find. Learn & Save.
Struggling with debt?
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q3 2023 was $17.291 trillion. Housing debt totaled $12.489 trillion and non-housing debt was $4.802 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in Mississippi, 35% have any kind of debt in collections and the median debt in collections is $1598. Medical debt is common and 16% have that in collections. The median medical debt in collections is $719.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.