Your credit cards are maxed out and you see no way to climb from all that debt by doing anything close to what you’ve been doing. You need a financial strategy – one known as debt relief. Within that approach are several choices, so, you need to pick the one that best suits you. Here’s all about debt relief options as well as consequences.
What is Debt Relief?
Well, it could mean using bankruptcy to clean your debts altogether, or it could mean getting your interest rate or payment schedule changed to reduce your payment amounts. It could also mean getting the companies you owe to accept a portion of your total debt to settle it.
Is Debt Relief a Good Fit for Me?
You may want to mull the strategy if, barring an unexpected windfall, you can’t envision yourself paying off your unsecured obligations – credit cards, personal loans, and medical bills, and the like – within five years, even if spending is pared to the bone. Also, does your debt come to at least half your gross pay? If so, debt relief is likely for you.
Now, if you CAN see yourself emerging from debt within five years, you may want to mull another strategy AND tighten up on the spending.
Bankruptcy as Debt Relief
Chapter 7 is the most oft-used form of bankruptcy and can clear most unsecured debt (obligations that are not linked to collateral such as your house or a car). Depending on your state of residence, you may have to relinquish some of your property such as a second vehicle or vacation crib.
Note that Chapter 7 bankruptcy, which can be completed in about four months, won’t wipe out delinquent taxes or child support requirements, and it usually won’t get rid of student loan debt.
What’s more, your credit scores will take a whopping hit, and notice of the filing will hang out on your credit report for up to a decade.
With Chapter 13, a notice of your bankruptcy will remain on your report for seven years. Essentially, with this type of bankruptcy, the court will come up with a repayment plan of up to five years in duration.
Debt Settlement as Debt Relief
If you ask the question, what is a credit card debt relief program? most people will think of debt settlement. While it isn’t for everybody, settlement is a popular form of debt relief. It involves hiring a company like Freedom Debt Relief to go to your creditors to see if they are open to letting you make a one-time payment in full to settle your liability. Creditors don’t want to – who would? – but they usually go along because they know that if you file bankruptcy, they have a good chance of coming up empty.
How it works is, after a consultation to assess your situation, you’ll be asked to start putting money in a savings-type account each month. This account will be the source of your payments after each account is settled. Because you aren’t paying your creditors until you settle, your credit score will take a temporary hit. After you’re done with the program and you start rebuilding your credit, your scores will rebound.
Debt Relief as Debt Management
With a debt management plan, you can wipe your total debts out and often at a lower rate or with fees waived. What happens is, you make a sole monthly payment to a credit counseling agency, which disburses the payments to the companies you owe.
The only provisos are that you’ll usually have to shutter your existing credit card accounts and will be asked to not open new ones until you’re done with the program. Oh, and you can be bounced from said program if you miss a payment.
Now that you know more about your debt relief options and consequences, you can move forward with confidence that you’ve picked a solution that’s best for you.