Debt Relief Guide – Bankrate.com | CarTailz

Have you tried different approaches to pay off your debt but haven’t had much luck? Or maybe your monthly debt payments are too much for your budget. Either way, you’ve probably thought at some point about seeking debt relief options to get your finances back on track.

There are several methods to choose from, but not all are ideal for your finances. Some could have adverse financial consequences that are difficult to overcome.

Debt relief refers to a tactic that can be used to make your debt burden more manageable. Many consumers consider various forms of debt relief in order to get cheaper monthly payments, a lower interest rate, or a faster way to pay off their debt. Some debt relief methods involve settling with creditors for less than what you owe, or in some cases filing for bankruptcy to get a clean slate.

Unfortunately, debt relief services can often mean bad news for your finances. Some consumers enroll in debt relief programs that they cannot exit or fall prey to scammers’ tactics. Either way, you could find yourself in an even deeper debt hole. Some debt relief programs can also affect your credit score — particularly those that suggest you stop paying while you’re enrolled or pay only a fraction of what’s owed to settle the outstanding balance.

Not all forms of debt relief are ideal for every consumer. It depends on your current debt load, creditworthiness, interest rates and financial situation.

debt consolidation

Debt consolidation combines multiple accounts into one to streamline the repayment process, save on interest, and potentially pay off your debt sooner. This approach can work if you have good or excellent credit and can qualify for a debt consolidation loan or balance transfer credit card.

Ideally, the debt consolidation loan will have a better interest rate than what you are currently paying on all of your debt. If you choose to use a prepaid transfer card, it is best to withdraw the amount transferred within the promotional APR period. It typically lasts between six and 21 months, and after that period, the balance earns interest at the card’s variable rate.

debt settlement

You can negotiate with creditors to pay off debts or hire a company to do it. If you choose the latter, the debt settlement company will ask you to make a set monthly payment into a special account. These funds will pay creditors and cover their fees if settlement offers are reached.

Meanwhile, some debt settlement companies will also advise you to stop making minimum monthly payments to creditors to speed up the process. In turn, your credit score will suffer if the missed payments show up on your credit report. However, there is no guarantee that your creditors will accept settlement offers, whether you are negotiating yourself or a debt settlement firm is negotiating.

Your credit score is negatively impacted when accounts are settled because they appear on your credit report as “partially paid” instead of “fully paid.” That being said, this approach can be risky for your finances.

debt relief

Some creditors and lenders offer debt relief options for borrowers who are in financial distress. You may be eligible to have some or all of your student loan, credit card or mortgage balance forgiven. Entering into a settlement agreement also constitutes debt forgiveness for that portion of the balance that the lender will not collect.

Debt relief may sound tempting, but it can also have dire consequences. Your creditworthiness could be affected and you may receive a tax bill if the amount forgiven is subject to tax.

credit advice

Credit counseling is available through nonprofit agencies, often free of charge. You meet with a credit officer to review your finances. During the meeting, they will also work with you to create a plan to better manage your income, expenses, and debt burden. You can also suggest other alternatives, such as B. A debt management plan to get your outstanding debt under control.

debt management plan

A debt management plan (DMP) is a two- to five-year roadmap designed to help you get out of debt sooner. You pay back the total amount owed, but the loan officer will work with your creditors to negotiate concessions, including fee waivers or reduced interest rates.

If the creditors agree to the plan, begin making the monthly payment specified in the DMP to the credit center. They will split this amount among the creditors each month according to the payment schedule in the agreement. You should also know that if you sign up with a DMP, creditors will most likely close your accounts. Also, you probably won’t be allowed to apply for new credit until the plan is complete.

bankruptcy

Bankruptcy is a type of debt relief that should only be used as a last resort. The two most common forms of bankruptcy are Chapter 7 (liquidation) and Chapter 13 (reorganization).

Chapter 7 often requires debtors to liquidate personal property to repay creditors. You don’t have to give up your assets under Chapter 13, but you do enter a payment plan that lasts three to five years before your debts can be paid under the bankruptcy filing.

Be sure to consult with a bankruptcy attorney before filing. Both have serious consequences for your creditworthiness. Chapter 7 will remain on your credit report for up to 10 years and Chapter 13 will remain on your credit report for up to 7 years from the filing date.

Scammers know that consumers seeking debt relief may be desperate for the help they need. So they are exploiting the vulnerability of those who need help with scams that could do even more damage to their financial health.

When researching companies that offer debt relief services, stay away from those that require upfront payment or promise offers of debt settlement. It is also a red flag when the company:

  • Tells you to stop all forms of communication with your creditors and lenders
  • Promises to make your unsecured debt go away or help you pay it off for pennies on the dollar
  • Suggests you use a “new government program” to eliminate your credit card debt

You can also avoid fraud by checking the company’s accreditation status with the National Foundation for Credit Counseling and the Better Business Bureau. Both platforms allow consumers to read complaints received (if applicable). And make sure you go to the DA’s office and search for the company to confirm it’s licensed to operate in your state.

When deciding on debt relief, weigh the pros and cons of each option to make an informed decision. Even if you’re bombarded with constant calls and letters from collection agencies, do your research to minimize your chances of entering into an arrangement with a collection agency or creditor that doesn’t benefit your finances, or becoming a victim of fraud.

Another word of caution: Avoid subscribing to unsecured debt over secured debt. Unsecured debt such as credit cards, personal loans, and medical bills are not backed by collateral. However, secured debts, like car loans and mortgages, are, meaning you could lose your assets if you default on payments.

You also want to avoid taking out a home equity loan or line of credit (HELOC) to pay off unsecured debt. These debt products use your home as collateral and put it at risk of foreclosure if you default on the loan.

Borrowing or withdrawing funds from your nest egg is also not a smart financial move when it comes to paying off debt. The more money you pull out of your retirement savings, the more you miss the opportunity to let compound interest work in your favor. If you borrow money from your 401(k) and lose or quit your job, the loan becomes a payout and you could owe taxes on the balance.

bottom line

If you’re drowning in debt, there are debt relief options that can help. But not all offer the same benefits or are right for your long-term financial health, and you could hurt your credit score or end up worse off than you started. Therefore, it’s important to understand how each debt relief option works and weigh the pros and cons before choosing the best strategy for your financial situation.

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