Getting out of debt can feel like a daunting task, especially if unexpected expenses continue to snowball and your bills pile up.
If your debt burden is starting to creep up on you, it’s always best to act quickly so you can get your finances under control before things escalate. But even if you don’t act quickly, there are ways to regain control. Your options run the gamut from more minor adjustments, such as debt consolidation or payment plans, to major course corrections, such as debt relief or bankruptcy. The right loan solution for you will depend on your financial situation.
Here are four options to help you get your finances back on track — and who should consider each one.
Consolidation of debt
Debt consolidation involves taking out a new loan to pay off your existing debts. The goal is to simplify your bills by consolidating multiple payments into one. Consolidation of debt It can also help you save money and pay off your debts faster, especially if you can get approved for a lower interest rate than what you’re using on existing loans.
You can get it with a Debt consolidation A loan, which is a type of personal loan that usually has a lower interest rate than credit cards or other high-interest loans. You can also use Balance transfer credit cardHome equity loan or Home equity lines of credit (HELOCs).
Bobbi Rebell, certified financial planner at CardRates.com, says debt consolidation is best for individuals whose debt is spread across multiple credit cards and loans. However, this usually only makes sense if you can qualify for a lower interest rate, which usually requires a good or excellent credit score. Also, you need a steady income that allows you to have the discipline to make total monthly payments and avoid overspending and taking on more debt.
Debt management plans
Debt management plans (DMPs) are offered by nonprofit credit counseling agencies to help people pay off their unsecured debt, such as credit card debt, over a fixed period of time (usually three to five years). could
Through a DMP, a credit counselor works with you to set a budget and negotiate with creditors for lower interest rates or fees. You will make a monthly payment to the agency, which then distributes the funds to your creditors. These plans usually come with a monthly fee, usually between $25 and $50, and some agencies may even charge an initial setup fee of around $30 or more.
Debt management plans It’s worth looking into if you want to avoid the credit impact of debt settlement or bankruptcy. These programs work best if you have a steady income to afford the monthly payments and are committed to following a structured repayment plan. They are also suitable for people who need guidance on budgeting and want help from an advisor to regain control of their finances.
These plans come with some drawbacks. Rebel says these plans don’t address secured loans, such as car loans or mortgages. Also, they usually require you to close your credit cards. This is to prevent you from adding more debt while you work on paying off your current balance. But closing your cards can temporarily lower your credit score by reducing your available credit and increasing your credit utilization ratio (the second most important credit-scoring factor).
Additionally, you may not be allowed to open new credit accounts while you complete the plan, which may limit your financial flexibility. And while most creditors agree to participate in debt management plans, some may refuse, meaning you’ll need to manage those debts separately. Finally, note that while credit counselors can negotiate your interest rate, they cannot negotiate to lower your balance.
debt relief
Debt relief programAlso called debt settlement, debt negotiation or debt forgiveness programs, debt relief is offered by companies that negotiate with creditors to reduce the total amount of debt you owe.
These programs typically take two to four years to complete, during which time customers typically stop paying their creditors. In a debt relief program, you make a monthly deposit into a dedicated savings account – this amount is usually less than the minimum monthly payments to your creditors. When you fund that account, the company will contact your creditors to negotiate a reduced settlement. You must approve each negotiated settlement, and then the company uses the money in your savings account to pay the settlement amount to the creditor. The idea is that creditors may prefer to receive a small amount paid immediately (or in an agreed series of payments) rather than receive nothing at all.
These programs are ideal for borrowers dealing with financial hardship who have significant Unsecured debt But those who don’t qualify for a debt consolidation loan or want to avoid filing for bankruptcy. “If someone isn’t making enough to pay their monthly bills, it makes sense to ask for debt settlement, especially if it helps avoid filing for bankruptcy,” Rebel says.
Debt relief will lower your credit score. If you’re already behind on payments, the impact may not be noticeable. And once your debts are settled, you should be in a better financial position to start rebuilding your credit.
If you want to handle debt settlement on your own, it is possible to negotiate directly with creditors without hiring a company. You can contact each creditor, explain your situation and request a lower payment. Although getting debt free this way can be difficult because it takes more time and effort, you can save on the fees associated with debt relief companies. Be sure to keep track of your payments and document all agreements to avoid any misunderstandings with creditors.
Bankruptcy
Bankruptcy is a legal process that can help people struggling with debt either wipe out some of their outstanding bills or plan to pay them off over time.
There are two most common types of bankruptcy Chapter 7 and Chapter 13:
Chapter 7 bankruptcy
Chapter 7 bankruptcy allows most of your unsecured debts to be discharged, meaning eliminated. Basically, it involves selling some of your non-essential assets (such as jewelry or a spare vehicle) to pay off your creditors, and any remaining debt is usually forgiven. If you don’t have valuable assets to sell, your creditors get little or no payment and your debts are still discharged.
Chapter 7 bankruptcy is often a good option if you have significant unsecured debts, such as credit cards or personal loans. However, it may not be available for everyone. To qualify, you need to pass a means test, which looks at your income and overall financial situation. If you earn too much compared to your debts, you are unlikely to qualify.
Also, Chapter 7 bankruptcy stays on your credit report for 10 years, so it’s important to understand the long-term impact on your credit before making a decision. “Because you didn’t pay off your debts, it will be harder to get credit in the future, and you’ll likely pay higher interest rates when you are able to get credit,” Rebel says. Also, your home may be at risk if you have significant equity that is not protected by a Homestead exemptionEspecially if you are behind on mortgage payments. In such cases, the court may require you to sell it to pay creditors.
Chapter 13 bankruptcy
Chapter 13 restructures your debts into a more manageable repayment plan, usually three to five years. You will make monthly payments to a trustee, who then distributes the funds to your creditors.
Chapter 13 is ideal for those who do not qualify for Chapter 7 due to high income but can still make regular payments. “With Chapter 13, there’s no income limit, and you create a repayment plan so you’ll likely keep your assets — like your home,” says Rebel.
However, Chapter 13 requires consistent payments, which can be difficult if your financial situation changes or if you continue to accumulate debt. It can also be expensive. Filing fees typically cost a few hundred dollars, while attorney fees can add up to $3,000 or more. Additionally, it stays on your credit report for up to seven years, but its impact is usually less severe than a Chapter 7. “Your loan will be restructured and your payments will be lower, but you’re still making payments. For this reason, Chapter 13 is less damaging to your credit report,” Rabble says.
If you are deciding between Chapter 13 and debt settlement, the best option depends on your goals. Chapter 13 offers a structured, court-approved repayment plan that protects you from creditor actions, including garnishment and collection lawsuits. However, it can take up to five years to complete, and if you fall behind on your payments, the court may dismiss your case for nonpayment. Debt settlement, on the other hand, can resolve your debts more quickly and requires no court supervision, but it offers no legal protection and creditors are not obligated to settle.
