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    All Your Options For Debt Relief

    Anyone who has more debt than they can handle knows very well the crushing, seemingly inescapable, weight the situation entails. 

    For some, the idea of becoming debt-free may seem impossible.  Fortunately, it’s not.

    Consumers have plenty of options at their disposal to effectively manage and reduce their debt. 

    Keep reading to explore the most common methods people use to regain control of their finances.

    Debt Settlement

    Debt settlement involves negotiating with one’s creditors in hopes that they’ll agree to a lesser amount than what’s currently owed.

    This option is only recommended in extreme cases and is used by those borrowers that don’t qualify for bankruptcy.

    Cost: Debt settlement can either be undertaken by the borrower or under the direction of a debt settlement company. In the case of the latter, the company will charge a fee to negotiatewith a borrower’s creditors.

    These fees are measured in one of two ways: a percentage of total debt enrolled (usually between 18% to 20%) or percentage of debt saved (12% to 15%).

    Benefits

    • Reduction In Debt: While the lender has no obligation to accept the terms presented to them, they’ll often agree to a settlement if they think there’s a risk of them receiving nothing should the borrower default.
    • Stop Collection Actions: Once a borrower's lender agrees to a settlement, lenders must stop any ongoing collection efforts.

    Debt Consolidation

    Debt consolidation involves taking out a loan to pay off all other debts, leaving the individual with a single monthly payment.

    Cost: A consolidation loan is normally unsecured debt that’ll come with the typical origination fee of 0.50% to 1.00% of the total loan amount. The APR that consolidation loans carry varies and depends on the lender along with the applicant's credit score. A typical APR for a consolidation loan can range anywhere between 5.49% to 36.00%.

    Benefits

    • Lower Interest Rates: Most borrowers successfully reduce their overall interest rate with a consolidation loan. This is especially true for those individuals consolidating high-interest debt such as credit cards, payday loans, and medical credit cards.
    • Simplified Payments: After consolidation, the borrower has only a single payment to worry about, which is easier to track compared to multiple payments.
    • Lower Overall Cost: Should a borrower access a lower interest rate, it’ll reduce the overall cost of repaying debt over the loan life. 

    Debt Management

    Due to the rise in consumer debt, the government created non-profit credit counseling agencies to assist those with large amounts of credit card debt.

    These counseling agencies negotiate with credit card companies in the hopes of receiving a reduced rate and the waiving of late/missed payment fees.

    This arrangement, referred to as a debt management plan, combines all credit card payments into a single monthly payment.

    While enrolled in a debt management plan, a borrower cannot open any new lines of credit.

    Cost: The majority of debt management plans are created by non-profit organizations, meaning there are no fees associated with the process. Private debt management companies exist but they usually charge a fee of roughly 15% of the total debt in question.

    Benefits

    • Lower Interest Rate: The lower interest rate negotiated by a credit counseling agency is the major benefit available from this process.
    • No Application Process: Unlike other debt management solutions, there’s no new credit being granted, meaning anyone can qualify.

    Bankruptcy

    When one’s financial situation has deteriorated to such a state that paying off their debts becomes impossible, the only remaining option is bankruptcy. 

    A Chapter 7 filing, the most common form of bankruptcy, can release people from all unsecured debts, such as credit cards, personal loans, lines of credit, and medical bills. Any secured debt (loans that were guaranteed with the pledging of an asset) will involve repossession, reaffirmation, or redemption. 

    Cost: Those filing by themselves can expect to pay between $350 - $500 in total. Filing with the help of a lawyer can cost anywhere from $1500 to $5000 depending upon the nature of the case.

    Benefits

    • Discharge Of Unsecured Debts: The main benefit of bankruptcy is the erasing of all unsecured debts.
    • Reduced Stress: Even though bankruptcy wreaks havoc on a borrower’s credit report, they’ll no longer be under the stress of meeting their debt payment obligations.

    Debt Relief Pros and Cons

    Pros

    • Lower Cost: The main goal of all debt relief strategies is to reduce the total cost of debt through one means or another. This gives the borrower a better chance of repaying their debt.
    • Peace Of Mind: Most people in debt just want it off their mind at any cost. This peace of mind and stress reduction is something offered by debt relief.

    Cons

    • Negatively Impacts Credit Score: Many debt relief methods, such as bankruptcy and settlement, have a strong negative impact on a borrower’s credit score.
    • Potential For Greater Debt: Borrowers who choose to consolidate their debt through a single installment loan or revolving line of credit face the possibility of racking up even more debt if they’re not responsible.

    Conclusion

    Although it may seem like becoming debt-free is nearly impossible, there are options that heavily indebted borrowers can pursue.

    By engaging an appropriate debt relief strategy, borrowers can put themselves on the path towards more secure long-term financial footing.