Your Debt Relief Options
With millions of Americans in debt, its understandable that various debt relief options have become more and more popular.
The important thing to consider as you review your debt relief options, is to understand the various benefits that different debt relief solutions provide, as well as the impact that debt relief may have on your personal credit.
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Depending on the debt relief option you choose, debt relief may be able to help you reduce interest rates, lower your payments, or even help you settle your credit card debts for much less than you currently owe.
In comparing various debt relief options, a debt management plan through a credit counseling agency could help you to pay back the principal amount of your debt much faster than you could on your own if you were to pay back at a higher interest rate. With debt settlement, you may not have to pay back your debt in full. Instead, your goal is to settle your credit card debt for less than the full amount owed. When you choose to settle your debts, a professional debt negotiator works with you and your lenders to arrange for one final lump payment, a payment that may be substantially less than you originally owed.
Depending on your circumstances, debt settlement could reduce your credit card debt substantially. It's important to know that every person's circumstances are unique, and the amount you save under debt settlement or any debt relief program is entirely dependent upon your financial situation and the amount of debt you have -- and your ability to allocate monthly funds necessary to stay on track with a debt management program or to set aside to be used to extend a settlement offer.
Debt Settlement - Important Things to Consider
While credit card debt settlement may be an increasingly popular debt relief option that is in certain instances preferable to bankruptcy, and while it could very well save you a substantial amount of money, it can also have a negative impact on your personal credit, so you should consider carefully all debt settlement, as well as any and all debt relief options before deciding on the one that best meets your needs. In addition, under a debt settlement program, if you stop paying credit card companies according to the terms of your agreement -- in order to build up a settlement fund -- you could face legal threats and actions from credit card companies.
Finally, it is important to know that any amount of money saved through debt settlement, substantial or otherwise, could be treated as taxable income so you need to understand the tax implications of debt settlement as well. Despite the fact that debt settlement impacts personal credit, can result in legal action, and have tax implications, it has still become an increasingly popular debt relief solution for those looking for a debt relief alternative to bankruptcy.
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Debt consolidation is a debt relief option allowing individuals to combine or "consolidate" multiple higher-interest credit card, or other unsecured debts (such as medical bills, store or gas cards) into a single, more affordable payment each month. Typically, debt consolidation programs are coordinated by debt counselors who customize a "debt management plan" providing consumers with a proven and predictable path to get out of debt.
Summary: What to Expect
If you have multiple credit cards and other unsecured debts like medical bills, doctor bills, store cards, unsecured personal loans, and more – a debt consolidation program coordinated through a debt counselor may be the ideal debt relief option to help you live within a set budget, reduce debts, and get on a path to become debt-free.
How do debt consolidation programs, or debt management plans work?
Typically, debt consolidation programs are coordinated by debt relief specialists, or debt counselors, who conduct brief interviews with you to get details on your credit cards and other debts, as well as how much you can realistically afford to pay each month to get out of debt.
Based on this information, your debt specialist will then customize a "debt management plan" for you. Once you approve the plan, letters will be sent on your behalf to each of your creditors requesting the benefits of debt relief – such as lower interest rates, a waiving of late fees and penalties, and generally more favorable repayment terms. Those creditors who accept the proposals are then added to the debt consolidation or debt management program. For those that do not accept debt relief proposals, you are still obligated to live up to the original terms of your cardholder agreement.
It's important to understand that, just as no two debt situations are exactly alike, no single debt solution is right for everyone. Your debt specialist can provide more details regarding debt consolidation or debt management as part of your free debt relief analysis and savings estimate.
Debt settlement is a debt relief option that has become increasingly popular among people who need relief from high-balance credit cards (typically $20,000 to $125,000 or more). Through debt settlement, debt specialists negotiate with creditors on your behalf – with the goal of "settling" your credit card debt for substantially less than you currently owe.
Summary: What to Expect
If you have one or more high-balance credit cards and are going through financial hardship – credit card companies may agree to "settle" your credit card debt for substantially less than you currently owe.
How does debt settlement work? A debt relief specialist will review your current credit card debts and the amount of money you can afford to set aside each month to accumulate a "settlement fund". Debt specialists will then negotiate with credit card companies on your behalf with the goal of settling debt for substantially less than you currently owe.
How much debt settlement could potentially save depends largely on the amount of credit card debt involved, your current financial circumstances – and the settlement policies of credit card companies.
It's important to understand that, just as no two debt situations are exactly alike, no single debt solution is right for everyone. Your debt specialist can provide more details regarding debt settlement or debt negotiation as part of your free debt relief analysis and savings estimate.
There are many well-respected self-help credit and debt experts who provide a wealth of valuable advice on the wise use of credit and how to become debt free – experts such as Dave Ramsey, Suzie Orman, Clark Howard, and many others. But regardless of the system you follow – the first step in a successful do-it-yourself debt relief program is to do everything possible to live within your means – avoiding unnecessary "impulse" purchases that cause debts to spiral out-of-control. By creating and maintaining a realistic budget, you will avoid taking on additional debt.
In addition, you can take steps on your own to reduce existing debt by contacting creditors directly to request more favorable interest rates or terms, or offer to settle debt for less than the full amount owed.
The bottom line: If you have high-interest credit cards and other debts and are struggling to make ends meet – you are in need of debt relief. Whether you take advantage of a debt relief program such as debt consolidation or debt settlement, or commit yourself to take control of your finances and negotiate with creditors on your own – take positive steps today to get on the path to become debt-free.
7 Important Debt Relief Tips
- Create a realistic spending plan – a personal or family budget
- Set aside money each month to pay down your existing debt
- Stick with your plan. Avoid unnecessary "impulse" purchases
- Contact your creditors requesting lower interest rates or to settle debt
- Pay down debts one-by-one, starting with highest-interest debt
- Don't use credit cards! Use a debit card to stay on track
- Avoid taking out additional loans that add to your debt load
Bankruptcy is generally considered to be the debt relief option of last resort. There are several types of bankruptcy: Chapter 7 (straight bankruptcy or liquidation), Chapter 13 (reorganization of debts), and Chapter 11 (debt reorganization normally used by a business or partnership). While a successful bankruptcy can provide a fresh financial start – individuals or businesses should carefully consider bankruptcy before proceeding because of its long-term financial implications.
While bankruptcy is a debt relief option that has been able to provide a fresh start for many individuals, families, and businesses – it is a serious decision that should be carefully considered with the assistance of a financial advisor or attorney who can help determine if bankruptcy is the proper course of action.
Prior to 2005, those filing bankruptcy could choose the type of bankruptcy they preferred – and most elected to file Chapter 7 straight bankruptcy (liquidation) over Chapter 13 (structured repayment). However, rules enacted in 2005 now requires those filing Chapter 7 to pass a "means test" – to qualify, they must earn equal to or less than the average monthly income for a family of their size in their state.
In addition, before you can file for Chapter 7 or Chapter 13 bankruptcy, you are now required to complete credit counseling with an agency that has been approved by the United States Trustee's office.
While bankruptcy plays a vital role to help rescue individuals and businesses, it is important to recognize that it's not the only debt relief option. A debt specialist can provide more details on debt relief alternatives to bankruptcy as part of your free debt relief analysis and savings estimate.
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