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Debt Relief Options:
There's no one-size-fits-all debt solution, so it's important to understand your personal financial situation and what your goals are. Only after getting your own goals prioritized should you pick a debt solution or a provider. To get you started, there are four primary concerns for most consumers that are seeking debt consolidation advice:
- Monthly payment
- Time to be free of debt
- Total expense
- The credit rating impact of the program.
Be sure to evaluate each program with these factors in mind - as not all programs are equal and not all are well suited to each consumer.
Debt Relief Option 1: Do Nothing
Many people wonder what would happen if you just do nothing. If you stop paying your unsecured debts, creditors have the right to collect the debt. You'll likely receive collection calls and letters from the creditor directly. If you're 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 significantly more aggressive in their collection tactics than original creditors, so don't be surprised if the calls become more persistent, or even threatening. The Fair Debt Collections Practices Act has rules governing the behavior of collection agents, although unscrupulous debt collection agencies seldom follow these rules.
In some cases, when all collection efforts fail, a creditor will file a lawsuit against the debtor. This is not a frequent occurrence, but it's within a creditor's rights and a possibility about which you should be aware. If one of your creditors sues you, the court may 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. Seek advice from an attorney if you're concerned about these specific consequences.
Regarding credit report impact, ignoring your creditors damages a credit score severely. It's also a warning flag to many lenders, who'll refuse to deal with a potential customer with a default on their record. As a result doing nothing and allowing default is a very bad option for most consumers.
Debt Relief Option #2: Bankruptcy
Bankruptcy may solve your debt problems, but is a very different and dramatic form of debt help (and not really considered debt consolidation). A Chapter 7 bankruptcy is a liquidation of assets and liabilities, and is usually considered a last resort. Since bankruptcy reform went into effect, it can be much harder to qualify for Chapter 7 bankruptcy, and many families are forced to file for Chapter 13 bankruptcy where you repay a portion of your debts over typically a five year period. If you're considering bankruptcy, you should always meet with a qualified bankruptcy attorney in your area and consider this option the most extreme.
Debt Relief Option #3: Debt Consolidation Loans
If you own a home, a secured debt consolidation loan may be an option for you. The current economic climate has made this type of solution difficult to acquire. This type of loan is a home equity loan which is used to pay off your other creditors. Secured consolidation loans help many consumers by consolidating all of their debts into a single monthly payment with a lower interest rate and payment amount. However, be careful before you borrow money against your home to pay off credit cards and unsecured loans; since you're converting what was previously unsecured debt into secured debt. This could cause you major problems down the road if for some reason you're unable to make your payments. If this happens, you can lose your home.
Debt Relief Option #4: Consumer Credit Counseling
Another option to consider is a Consumer Credit Counseling Service, or CCCS. CCCS companies offer numerous services, such as financial counseling and budget planning, as well as Debt Management Plans (DMPs). In a DMP, the CCCS would arrange a new payment amount with each of your creditors, usually based on a reduced interest rate. You would then make a single monthly payment to the CCCS which would distribute the funds to your creditors, based on the new payment amounts. There are several drawbacks to CCCS though. First, depending on your creditors, it may not be able to reduce your monthly payments enough to improve your financial situation. Second, it may have a negative impact on your ability to obtain a loan, so you may not wish to enter into a DMP if you anticipate any large purchases, such as home or an auto, in the near future. Third, the average DMP takes around five years to pay off your debts, so you must be willing and able to commit to a long-term repayment plan. Lastly, you'll typically end up paying your full balances plus interest and fees.
Debt Relief Option #5: Debt Settlement
You may also want to consider the services offered by debt settlement firms. Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, for less than the full balance owed. These programs approximately take only 12-48 months to complete, so this is a great option for many people to rid themselves of debt in a relatively speedy manner. In many cases they can also get you set up with low monthly program payments that are typically much lower than your current payment obligations. There is one drawback to debt settlement programs - they can negatively impact your credit while in the program. You can also be exposed to your creditor's collection efforts, including letters, calls and possible lawsuits, so dealing with a debt settlement law firm is the preferred route. However, if you're currently unable to afford to pay your creditors, the hit to your credit should be worth the benefit of ridding yourself of debts.
Summary - Comparing Your Debt Relief Options
Although there are many forms of debt consolidation, each consumer is different, so find the debt consolidation option that fits for you.
Lastly, here are some fast tips for your own quick Debt Consolidation Evaluator:
- If you have perfect credit and have equity in your home - see if you can qualify for a Mortgage Refinance.
- If you can afford a healthy monthly payment (about 3 percent of your total debt each month) -- consider Credit Counseling and Debt Settlement.
- If you want a low monthly payment and want to reduce the principal amount of your debt, AND you're willing to deal with potential negative credit impacts -- then evaluate Debt Settlement.
- If you cannot afford anything in a monthly payment (less than 1.5 percent of your total debt each month) -- consider Bankruptcy to see if Chapter 7 might work for you.