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Learn about Debt Relief. Understand your Options and the Consequences

You may find yourself stuck in debt and not making progress, no matter how hard. If this is the case, it could be that you have too much debt.

Take a look at your debt relief options to help you get rid of this financial burden. These tools will allow you to change the terms of your debt and increase your chances of getting back on your feet quickly. Check it out:

Debt-relief plans aren’t the right solution for everyone. You need to be aware of the possible consequences.

This could include removing the debt completely through bankruptcy or changing your interest rate or your payment schedule to lower the payments.

When is it time to seek debt relief

Take into account bankruptcy, debt management, and debt settlement if either one is true.

  • You cannot repay unsecured debts (credit card, medical bills and personal loans) within five year, no matter how hard you try to reduce spending.
  • Your unpaid unsecured credit equals half of your gross annual income.

You could also consider a DIY plan if your unsecured loans can be repaid within five years. You could combine debt consolidation with appeals to creditors or stricter budgeting.

Do not forget: Debt relief can make it worse

Scammers operate in the debt relief business and will try to steal your few dollars. Many people who join debt relief programs never complete them. You might end up with bigger debts than when you started.

You may find that debt relief is the right thing to help you get the start you want or the breathing room you need.

Before signing any agreement, be sure to understand these points and verify them.

  • What you must do to qualify.
  • The fees that you will be charged
  • Who are the creditors getting paid and how much. If your debts are in collections, ensure you know who is responsible so that payments are sent to the right agency.
  • The tax implications

Bankruptcy can be used to relieve debt

If you can’t pay the agreed amount, there’s no point in signing a debt settlement agreement or debt management plan. Before you seek any type of debt relief, it’s a good idea first to speak with a bankruptcy attorney. The initial consultation is often free. If you don’t qualify for the program, you can explore other options.

Chapter 7 liquidation (the most common type) can eliminate most credit card debt, unsecured loans, and medical bills. If you’re eligible, it can usually be completed within three to four months. Here’s what you need to know

  • It won’t erase tax owed or child maintenance obligations. Also, student loan debts are highly unlikely to get forgiven.
  • It will ruin your credit score and stay on credit report for as long as 10 years, even after you make good credit. It’s not a small matter, since poor credit history can have a negative impact on your eligibility for certain jobs and your chances of getting an apartment rental. You may be able to rebuild your credit sooner than you would if your credit was already in bad shape. Learn more about bankruptcy and when it is best to file for bankruptcy.
  • If you used a third party co-signer, bankruptcy will make the co-signer fully responsible for the debt.
  • If you have accumulated debts, you cannot file another Chapter 7 bankruptcy in eight years.
  • You might not want to do this if it means you have to part with property you own. State laws vary. You are generally exempt from bankruptcy for certain types of property such as motor cars up to a specific value and a portion of the equity in you home. However, you may have to give up a 2nd car or truck, family members heirlooms and vacation homes and any valuable collections.
  • If you’re “judgmentproof”, meaning that you don’t have any income or property that creditors can take after, this may be unnecessary. However, creditors will not be allowed to collect if they sue and get a judgement against you.

However, not all people with overwhelming debt are eligible. Chapter 13 bankruptcy is an option for those whose income is higher than the median in their state and who have a home they want to avoid foreclosure.

Based on your income level and debts, Chapter 13 is a court-approved repayment program that lasts three to five years. The remainder of your unsecured debt can be forgiven if the plan is followed for its entire term. It may take longer than Chapter 7. However, if your payments are on track (which is most people’s), you will still be eligible to keep your property. You will have a Chapter 13 bankruptcy on your credit report for seven year after filing.

Management plans for debt relief

A debt management plan will allow you to pay your unsecured credit card debts in full. It may also reduce the interest rate or waive fees. One monthly payment is made to a credit counselor agency. The agency distributes the money among your creditors. Credit card companies and credit counseling agencies have longstanding agreements in place for debt management clients.

Your credit card accounts are going to be closed. Most people will have to stop using their credit cards until they complete the plan. Many people fail to complete them.

Your credit scores are not affected by debt management plans. However, closing down accounts can impact your credit scores. Once the plan is completed, you can apply to credit again.

But, you can lose your plan if there are missed payments. Also, it is important that the agency you choose is accredited by the National Foundation for Credit Counseling and the Financial Counseling Association of America. Make sure to understand all fees and the options that you have when dealing with debt.

You can get relief through debt settlement

The financial game of “Chicken” is debt settlement. We don’t recommend debt settlement to the vast majority. Bankruptcy can almost always be a better alternative; debt settlement should only be used as a last resort by those who have overwhelming debt and cannot file bankruptcy.

The majority of debt settlement companies request that you stop paying your creditors and instead place the money in an accounts they control. Each creditor is approached when the money accumulates and you fall further behind with payments. Fear of getting nothing may drive the creditor towards a smaller lump sum offer and not to pursue your case for the rest.

You could be subject to collections calls, penalties, and legal action if you don’t pay your bills. While you are still in negotiations, debt settlement will not stop these things. Expect to wait between four and six months before settlement offers start. The process could take many years, depending upon how much you owe.

Further, late payments can further harm your credit score.

Taxes on the forgiven amount (which are considered income by IRS) may be due to be paid. These lawsuits could lead to wage garnishments or property liens.

Either you hire a professional or attempt to settle the debt yourself. Unfortunately, there are many bad actors involved in debt settlement. The Federal Trade Commission and the National Consumer Law Center warn consumers not to trust these organizations.

These companies might also claim to be debt consolidation agencies. They aren’t. It is possible to consolidate debt on your own and it will not affect your credit score.

Do-it-yourself debt relief

You don’t have to borrow money from these debt relief options in order to create your plan.

Credit counselors often do the same thing in debt management programs: You can contact creditors to explain your situation and offer concessions. There are many credit card companies that offer hardship programs. These programs may lower your interest rates or waive fees.

You can also contact creditors to educate yourself about debt settlement and negotiate an arrangement. Learn how you could negotiate a settlement of your debts on your own.

You may have other options if your debts aren’t insurmountable. If you have a good credit score, you might be able apply for credit cards with a 0% balance transfer rate. This could allow you to give yourself some breathing space. Another option is to get a debt consolidation loan at a lower rate.

These options will not affect your credit score. Credit scores should rebound as long as your payments are made.

This route is not the best, but it is important to create a plan that will stop you from getting into more credit card debt. Also, it is difficult to apply for a new loan or card if you are in great debt. This can often lead to missed payments, high balances, and a poor credit score.

What not do

Sometimes, overwhelming debt comes with devastating rapidity — a health emergency, unemployment or a natural tragedy. It may have started slowly, and creditors or collection agencies are now pressing you to repay.

Here are some suggestions for people who feel overwhelmed by debt.

  • Do not pay a secured (like a payment for a car) late to make room for an unsecured (like a bill for a hospital or credit card). You may lose the collateral (your car) that secures your debt.
  • Do not take out a loan against the equity in your house. You could endanger your home by putting it at risk.
  • For unsecured debt repayments, don’t draw money from retirement savings. This is financial suicide.
  • It is worth thinking twice about borrowing money from retirement accounts at work. Inadvertent withdrawals of the loans can cause a loss of employment and could result in a tax bill.
  • You shouldn’t make decisions based solely on what collectors are urging you. That may result in actions that aren’t in the best interest of your family. Instead, do your research and find the best option for you.

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