When you’re deciding what to do about your debt, you have to know your options. You shouldn’t make a decision about any debt relief option until you’ve researched and compared all the options out there. Only then can you make an informed decision about your debt.
Consumer Credit Counseling
Credit counseling agencies help consumers get out of debt through financial counseling sessions and by setting up a debt management plan with creditors. Under the debt management plan, you’d have a reduced interest rate and minimum payment negotiated by the credit counseling agency. You send a lump-sum monthly payment to the credit counseling agency and the agency then sends your payment to each of your creditors. Your debts still remain intact, however, the credit counseling agency is acting as a middleman between you and the creditors.
Debt consolidation has similarities to credit counseling in that you pay a single monthly payment for all your debts. The major difference between the two options is that with debt consolidation you pay off your existing debts with a loan large enough to cover all the balances. You no longer owe the original creditors. Instead, you now make payments to the bank that provided the loan for consolidating your debts. One method of debt consolidation is to use a home equity loan or second mortgage to pay off debts.
Debt settlement also involves a single monthly payment, however, the monthly payment doesn’t go to your creditors. Instead, the payments accumulate in a separate bank account until there’s enough money to settle one of your debts. The goal is to settle your outstanding debts for 40% to 60% of the outstanding balance. If your creditors agree to the lower settlement amount and to cancel the rest of the balance, they’ll typically require you to make the settlement payment all at once. That’s why it’s necessary to save up for settlements. Settlements can be done on your own. However, an experienced debt settlement company may be able to provide better results than you can achieve alone.
Many people consider bankruptcy a last resort, but if it’s the only solution that will work for your debt, you shouldn’t put it off. The sooner you file bankruptcy, the sooner you can get your life back on track. There are two types of bankruptcy available for consumers. Chapter 7 bankruptcy results in a discharge of your unsecured debts within a few months. Chapter 13 bankruptcy involves a three to five year repayment plan followed by a discharge of any outstanding debt.
Credit Consequences of Debt Solutions
Most people choose one solution over another based on what’s going to happen to their credit score. Don’t let a desire to save your credit keep you from becoming debt free. Credit counseling is noted on your credit report, but not factored into your credit score. Debt consolidation isn’t indicated on your credit report, but can impact your credit score if you consolidate using a credit card balance transfer. Debt settlement does impact your credit score, more in the beginning, but the listing is removed from your credit report after seven years. Bankruptcy hurts your credit score and stays on your credit report for seven years.
Which Can You Afford?
The best debt solution also depends on how much you can afford to pay. With credit counseling and debt consolidation, your monthly payments will be similar to the minimum payments you have now. Debt consolidation may lower your minimum payment if you qualify for a lower interest rate and can get approved for a long-term loan. Debt settlement is based on your ability to pay, but the longer it takes you to save up for a settlement, the longer you’ll be in debt. Finally, Chapter 7 bankruptcy cost may be limited to filing fees and Chapter 13 repayment is based on your income and expenses.
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