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Debt relief can take various forms, from debt consolidation to bankruptcy, with the ultimate goal of making your debt more manageable. If you’re overwhelmed with debt, pursuing debt relief can create an opportunity to improve your financial situation.
Debt relief involves reorganizing or negotiating your debt in a way that makes it easier to repay. Depending on the type of debt relief you choose, you may be able to:
If you’re in need of debt relief, lenders are often willing to work with you, especially if the alternative is default. However, the types of debt relief available to you and the best path depend on your situation.
There are four types of debt relief you can use to work toward becoming debt-free. Depending on the severity of your financial situation and your ability to repay what you owe, one method may be better than the others. Here’s a quick summary of each and when you might consider them.
Debt consolidation involves applying for a loan or balance transfer credit card and using it to pay off existing debts. This strategy works best if you can qualify for a loan or credit card that offers a lower interest rate than what you’re currently paying. Options include:
Debt consolidation is best for borrowers who have a manageable amount of debt and a relatively high credit score, which is necessary to qualify for favorable rates on a consolidation loan or credit card.
If you’re having trouble making your monthly payments and your credit is less than perfect, working with a credit counseling agency could be a good next step. A credit counselor can help you with basic things like creating a budget and can also put you on a debt management plan to help you pay off credit card debt. With this arrangement, the credit counselor can negotiate lower interest rates and monthly payments with your creditors, and you’ll make just one monthly payment to the credit counseling agency.
However, you may be required to close your credit card accounts, and you generally can’t apply for new credit until you complete the debt management plan, which typically lasts three to five years.
If you’ve already missed some payments and a debt management plan isn’t the right fit, you may consider debt settlement. With this option, you’ll attempt to negotiate with your creditors to settle your unsecured debt for less than what you owe. You can do it on your own or with the help of a debt settlement company or law firm.
Debt settlement can help you eliminate debt, but if you don’t have enough cash to pay the lump-sum settlement amount, it’s not a viable option. And if you work with a debt settlement company or law firm, their tactics could further damage your credit and cost you more money.
If your debt situation is so dire that you can’t even afford to make modified monthly payments, bankruptcy may be the last resort option. There are two types of consumer bankruptcy—Chapter 7 and Chapter 13:
Like debt management plans and debt settlement agreements, filing bankruptcy typically won’t get rid of your mortgage, auto, or student loans. Bankruptcy can be worth considering if you’ve exhausted all other options. But keep in mind that it will do serious damage to your credit and will factor into your credit score for up to 10 years.
Debt relief companies specialize in facilitating a debt settlement arrangement between a borrower and a creditor. Because the settlement amount is typically a lump sum, for-profit debt settlement companies often encourage you to stop making payments on your debts and instead make payments into an account with the company until you have enough to settle.
Missing payments for an indefinite period of time can damage your credit score significantly and cost you hundreds or even thousands of dollars in fees—and that’s on top of the fees you’ll pay the company or law firm. There’s also no guarantee that you’ll get the results you’re looking for, and you could fall victim to a scam. As a result, it’s generally best to pursue other options or attempt to settle on your own.
Regardless of which type of debt relief you pursue, it’ll likely have an impact on your credit score. However, that impact can vary depending on what you choose and how you proceed:
Getting out of debt sooner than later is always appealing, but depending on the potential negative long-term impact, it may not be worth it. As you consider which debt relief approach to use, think about the trade-offs for each one.
Check your credit score and credit report to get a better understanding of your situation, and research your options to determine the best one for you. If you’re having trouble figuring out the best path forward, consider reaching out to a credit counseling agency to get some basic advice based on your situation. While they can help with a debt management plan, they can also tell you whether one of the other debt relief methods would be a better fit.
For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your financial journey with confidence.
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