As you know, I’ve talked on my blog about budgeting and our own journey to become debt-free. There are times, however, when simply budgeting and saving money to pay down your debt won’t work.
In these more extreme and unfortunate cases, debt relief can ease the crush of overwhelming debt. You might be unsure how the process works, or even if you qualify. To learn whether the strategy is right for you, read on.
What Is Debt Relief?
This approach could entail eliminating your whole debt through bankruptcy, getting your interest rate or payments lowered, or negotiating with creditors to get them to accept a portion of what you owe.
When Should You Seek Debt Relief?
In general, you’ll know when you should look for debt relief through bankruptcy, debt management, or debt settlement if:
- You won’t be able to repay your unsecured debt such as credit cards, medical bills, or personal loans within five years, even if spending is cut to the bone, or
- Your outstanding unsecured debt amounts to at least half of your gross income.
Debt Relief Through Bankruptcy
Talk to a bankruptcy attorney before pursuing bankruptcy — either Chapter 7 or Chapter 13. The consultation is typically free, and you can rule the strategy out if it’s not for you.
Chapter 7 is the most common form of bankruptcy, and can eliminate most unsecured personal loans, medical debt, and credit card debt. Depending on your state you may have to relinquish property.
The filing will stay on your credit report for about 10 years. However, if your credit is already bad, Chapter 7 may give you a chance to rebuild your credit much faster than continuing to attempt to repay.
Chapter 13 bankruptcy is a court-approved plan of three to five years that’s based on your income and debt load. If you can hang with the plan through its completion, your remaining balance will disappear, and you can keep your property.
Chapter 13 takes longer than a Chapter 7 but stays on your credit report for just seven years.
Debt Relief Through Debt Management
This kind of plan lets you pay your high-interest credit card or other kind of unsecured debt in full, but frequently at a lowered interest rate or with waived fees. How it usually works is, you make a monthly payment to a credit counseling agency, which allocates the monies among your credit card issuers or other creditors.
Until the plan is completed you usually won’t be able to open new credit accounts, and current card accounts will be closed, which can hurt your credit score. But you can apply for credit again once your debts are paid.
Make sure the agency is accredited by the Financial Counseling Association of America or the National Foundation for Credit Counseling.
Debt Relief Through Debt Settlement
These plans usually involve you ceasing creditor payments and instead depositing that cash into an escrow-like account that you control. Once you have amassed sufficient funds, the agency will approach your creditors about accepting a percentage of what you owe. Because you have stopped paying them, most creditors are motivated to take something rather than nothing, which is also the outcome if you file bankruptcy. Check out online debt relief programs at www.freedomdebtrelief.com.
While effective, these plans will damage your credit, at least until you correct your financial course. Also, you’re subject to collectors’ calls and possible lawsuits. Settlement offers don’t usually begin for four to six months, and repayment could take several years.
Still, the strategy works, and may be just what you need, short of bankruptcy, to start anew.
Now you know when you should look for debt relief, and what all it entails. Figure out what’s right for your situation and begin your new life of financial freedom.