Decoding the different ways to get out of debt and how they apply to your unique situation
With the total consumer debt in the United States hovering around 2.4 trillion dollars, financial hardship is a reality countless people face daily. Although those in debt can be comforted knowing they are not alone, when deciding how to handle a debt, it is important to understand that what works for others may not be the best solution for you. Equipped with the right information, you can determine what method is ultimately best suited for you.
How much debt do you have?
When debt can be handled without help
Self-management And Payment in Full
Self-management is one way to pay your debt in full. There are countless “how to” articles out there, all offering different payment strategies and advice, ie. pay off the credit card with the highest interest first or pay off the card with the lowest balance first, etc. While using one of these systems to pay off debt may work for those with smaller debts or a steady job, the reality is that most people are in debt because payment in full was not a viable financial option for them.
What to do when you are beyond self-help
Many people who are in debt have moved beyond the point of self-help and are in need of assistance. The best-suited programs for these individuals will hinge on their ability to pay the full amount owed. For many struggling with debt, paying the full amount of the debt, even over an extended period of time, is not a realistic option.
Debt Management Program
In a debt management program, the management company essentially steps into the debtors’ shoes in the eyes of the creditors. The debtor will make monthly payments to the management company who will negotiate the interest rates and fees with your creditors and disburse the monthly payments to each as agreed. With a debt management plan, you are not reducing the amount you pay, but simply paying the full amount with a possible lower interest rate as negotiated by the management company. It is important to keep in mind that making late payments to the management company can have severe consequences in the form of penalty late fees and negative marks on your credit report.
Debt Consolidation Loan
This is an option for those borrowers who have multiple creditors they are indebted to. In a debt consolidation loan, you take out one larger loan to cover the debts of your past loans, essentially paying off all of your debts at once. This consolidated loan may have a lower monthly payment and lower interest rate than the other loans, making it an appealing option in the short term. Consolidated loans are also an attractive option because they have a minimal effect on your credit score. However, consolidation does not eliminate debt, but rather transfers several high-interest loans to one long-term, lower interest loan. It’s important to keep in mind that in order to secure a low interest consolidation loan, a form of collateral, such as the deed to your home, is often required. Essentially, debt consolidation provides little or no debt relief, it is a swap of one debt for another.
When paying off the whole amount is not an option for you
Debt Settlement Negotiation
With formal debt settlement negotiation, a third party negotiates with your creditors on your behalf to work out a settlement agreement in which you’re obligated to pay only a fraction of the original debt owed. The entire process can take 6-36 months, making debt settlement a much faster road to debt relief than consolidation, which can take up to 15 years in some cases. If your creditor becomes impatient, having an attorney as your negotiator affords you protection if your creditor were to pursue legal action against you. Unlike bankruptcy, with debt settlement you are not forced to liquidate/sell your assets.
Declaring bankruptcy is a life altering decision and yet for some people, it’s their only option. Chapter 7 bankruptcy essentially wipes your slate clean, but at a large cost. Chapter 13 bankruptcy can take up to 5 years to complete and you end up paying back most of your debt. Depending on which kind you qualify for, filing bankruptcy may come at the expense of your property, assets, and credit score. Thus, for most, bankruptcy is a drastic and last resort option.
Faced with the many different ways to get out of debt, figuring out the right choice on your own can be overwhelming. The attorneys at McCarthy Law offer a free consultation and can help you to determine what is the best course of action for your financial situation.