Debt Consolidation and Other Debt Relief Options

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A Brief History

Nowadays, when people struggle to manage debts, it is natural that they seek debt relief. They do this by changing the amount they owe or the terms so that they can quickly get around the problem and be back on their feet fast. Although there are several debt relief programs, these are not magic wands, and the programs might not be the right solution for everyone. Debt relief programs work in various ways, and it is vital to understand the consequences to decide about its effectiveness. Depending on the kind of relief you seek, whether you want to wipe out all debts, lower your payments by changing payment schedules or seek changes in your interest rate; or persuade creditors to accept a lower payment than you owe for settling debts, you can choose a suitable solution.

You can seek debt relief through debt management programs. They do not reduce debts but enhance your capability in dealing with debt. Its effect on credit score is less severe than bankruptcy which, despite eliminating all debts, will damage your credit score severely.  Moreover, you cannot erase or reduce some types of debts like student loan, secured loan for cars and homes and child support. Struggling with debts is the slowest and less effective method of debt relief.

Sometimes dealing with too many lenders is the cause of problems for borrowers who find it extremely difficult to manage several loan accounts. Despite having the wherewithal of making payments, they are unable to monitor the accounts and make timely payments on different dates. It becomes clear that they would be better off had they dealt with a single lender only. For them, debt consolidation is the right solution.

Digging Deeper

When to seek debt relief?

Better budgeting can help, to some extent, to manage debts. But even if you cut down your expenses drastically, you would still be in the water. That is why debt relief is perhaps your best option to ensure that you are on safe shores; however, changing spending habits and exercising better control on expenses are options that you must try first. Debt relief is neither pain-free nor easy fix. To decide when to seek debt relief, you must consider the total debts you carry. In case it is more than 50% of your total income, then you must seek debt relief. If you lose all hopes of paying back all debts within 5 years despite taking extreme steps to control spending, then you must think about debt management, debt settlement, debt consolidation or bankruptcy.

Tread with caution

The debt relief industry is a thriving sector in the financial business. Beware of scammers who are out to dupe people looking to enter debt relief programs.  They are notorious for misleading people which is why many people availing debt relief programs fail to complete it. And they could end up in debts which are much more than what they wanted to get rid of. However, when chosen carefully, debt relief programs can give you breathing room and the opportunities for reorganizing your finances to make a new beginning.

It is essential to understand a few things before you sign a contract with any debt relief company like NationaldebtRelief.com.  Check what factors you need to fulfil to qualify for the programs. Next, check the plan of debt relief to understand which creditors you would pay off and how much. In case your debts are in collections, make sure who owns the debt so that the payments for settlement go to the right place. Lastly, you must be aware of the tax implications.

Debt settlement

When someone faces enormous debts and is unable to file for bankruptcy, the next best option is to seek debt settlement. Remember that the method suits only those who face overwhelming debts. Debt settlement companies take up the brief of their clients and ask them to stop making any further payments to creditors but put the money in an account that the company controls.  It sends a signal to creditors about your inability to make payments and is a ploy to bring them to the discussion table for negotiations about settling debts. As the money accumulates in the account and the payment defaults keep building, thereby increasing your liability. The debt settlement company will then approach the creditors to explain your position and inability to make any further payments.  They instil a fear among creditors that there are high chances that they might not get back their money. Creditors realize that it would be better for them to reach some settlement rather than lose the entire amount due to them. And in the process, they would be ready to accept the even lesser amount as a lump-sum payment and agree not to pursue you for the rest; however, while you are negotiating with your creditors, you would be receiving collection calls as you are not paying the bills. You could even face potential legal action as well as penalty fees. As the process of negotiation can take quite a few months depending on the amount you owe and the number of creditors you must bear the hassles all through.

Debt consolidation

The financial strategy of debt consolidation consists of knocking off multiple debts and converting it into one single debt that is easy to manage. If you are carrying several high-interest debts, it makes good sense to consolidate the debts. Then you can replace it with a single debt that you can avail at lower interest and save some money.  You must first calculate the total amount of outstanding debts at the time and talk to your creditors to make them accept pre-payment for settling the debt. Next, you must avail a new debt consolidation loan equivalent to the total outstanding amount. Then negotiate with the new lender for a lower interest rate than the average interest that you were paying till then.

The move will help you in three ways – you pay back all outstanding debts. You have to deal with a single creditor and make less monthly payment dues to lowering of interest and save some money. Not only will you enjoy an easy life with debts but also get the opportunity of using the money saved in a better way that helps to reorganize your finances. Like any other debt relief programs, debt consolidation works only for settling unsecured loans.

Your credit score will be lowered temporarily when you avail a new loan. But making timely payments will also allow you to rebuild your credit score very fast.

Debt management

A debt management plan is applicable for settling in full unsecured loans, especially credit card debts and often accompanied by fees waiver or at a reduced interest rate. To implement a debt management plan, you must work with a credit counselling agency. It will take the responsibility of handling your credit account and deal with the credit card companies and other creditors. The credit counselling agency collects monthly payment from you and distributes it among the creditors. It brings great relief because you do not have to face creditors anymore.  Credit counselling agencies and credit card companies work in tandem to help clients in debt management, and they have long-standing contracts signed for the purpose.

Although the arrangement allows you to clear all debts, you must be ready to accept the damage that the process does to your credit score.  Moreover, you cannot use the credit cards until you complete the repayment, which makes take some time. The damage to the credit sore happens not from the debt management plan, but as you must close credit accounts, it hurts the credit score. You can start rebuilding your credit score once you complete the repayment. But you cannot afford to miss payments as it can stall the process. You must only rely on an agency accredited to Financial Counseling Association of America or the National Foundation for Credit Counseling.

Bankruptcy

Too large debts that seem unsurmountable drive people towards filing for bankruptcy. You must consult a bankruptcy attorney to evaluate the possibilities for filing for bankruptcy to understand if it is the best debt relief for you. Since initial consultations are free, it gives you the option to try something else if it does not work for you. Chapter 7 liquidation is the most common form of bankruptcy that wipes out all unsecured debts except for taxes owed, student loan and child support obligations. It will reset your credit score to zero and will stay in your credit history for 10 years despite your efforts in building new credit. It can be severely damaging for your future as it will impact your job prospects. It can get difficult for you to hire or lease an apartment and increase your car insurance. It can also end up in giving up your property and some other assets. Considering bankruptcy should be the last resort because of the severe effects it can have on your financial future.

When taking up any debt relief program, you must stay committed to making timely payments as agreed. Else it will be futile to try to settle debts.

Question for students (and subscribers): What do you think are the best options for debt relief?  Please let us know in the comments section below this article.

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Historical Evidence

For more information, please see…

Reed, Mary and John Ventura.  Managing Debt For Dummies.  For Dummies, 2007.

The featured image in this article, a graph by Wikideas1 of consumer and Government Debt as a % of GDP (United States), is made available under the Creative Commons CC0 1.0 Universal Public Domain Dedication.

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About Author

Abdul Alhazred

“But I don’t want to go among mad people," Alice remarked. "Oh, you can’t help that," said the Cat: "we’re all mad here. I’m mad. You’re mad." "How do you know I’m mad?" said Alice. "You must be," said the Cat, "or you wouldn’t have come here.” ― Lewis Carroll, Alice in Wonderland