When you’re flooded with bills, you begin grasping for anything to hold onto that will save you from drowning in debt. If you’re positive that you’re unable to pay your unsecured debt such as credit card bills, medical bills, or personal loans within five years – you may want to consider seeking help.
Regardless of the reason for accumulated debt, there are a few options, such as debt consolidation and debt settlement, that you can opt for if you’re struggling with your finances.
Let’s walk through a few of these debt assistance options to see if one of these could be right for you.
Debt Relief Services that you can choose
Before opting for a debt relief service, check with the state Attorney General and local consumer protection agency to see whether the agency has any consumer complaints against them. You shouldn’t trust verbal promises, instead request written statements.
- Credit Counseling
You can reach out to a reputable credit counseling organization to receive guidance on developing a personalized plan to face and solve your debt issues. The professional counselors will hold a one-hour initial session, which will be followed up by many. There are numerous reputable credit counseling organizations that are non-profit. They often offer their services over the phone, through their local offices, or online. You can find them in many military bases, housing authorities, certain universities, credit unions, and branches of the U.S. Cooperative Extension Service.
However, finding an in-person counseling service is beneficial. Likewise, be well aware of the agency you choose – some of these may not be legitimate and will demand unnecessary charges.
- Debt Management Plans
A Debt Management Plan (DMP) should be recommended by a certified credit counselor after a thorough review of your financial situation. With your credit counseling organization’s advice, you have to deposit money every month to this DMP in order for them to spend it on your unsecured debts such as credit card bills, medical bills, student loans, etc. Of course, this payment schedule will be created by your counselor, with you and your creditors. Your creditors might lower your interest rates after the discussion. To fully benefit from your DMP you need to make timely payments understanding the program will take approximately 48 months to complete.
- Debt Settlement Programs
Simply put, debt settlement companies negotiate with your creditors in order to give you a chance to pay a settlement to relieve your debt. This lump sum is a lesser amount than you originally owed. This program requires you to allocate money and put the savings in a specific account that they control monthly instead of paying your creditors. The money that is collected will be spent to pay the settlement.
Cons of debt settlement
- Many people fail to deposit a specific amount monthly because the debt settlement program requires the money to be in an account for approximately 36 months. It is always wise to review your budget before going for such a plan.
- Debt settlement companies usually negotiate with the creditors to resolve smaller debts at the beginning making the large debts grow higher and higher. Likewise, your creditors can always say no to negotiation, so the company might not be capable of settling your debts after all.
- Because you won’t pay directly to your creditors, they may proceed with legal action or if they win a lawsuit they can hold your properties until your debt is paid in full.
- Some debt settlement companies will ask you to pay upfront prior to enrolling you in the program. Be aware of these companies.
- Debt Consolidation
You can reduce your credit cost by taking out a second mortgage on your home. If you don’t make timely payments you will lose collateral in the process. These loans are costly and you are required to pay points. In other words, 1 point equals 1% of the amount you borrow.
Remember that Debt Consolidation loans won’t free you from the original debt but will instead transfer your loans to a new lender or a type of loan.
A court proceeding will decide whether you are able to pay off your debt and, if you are discharged, you can be legally free of debt. There are two types of personal bankruptcies – chapter 7 and chapter 13.
In chapter 7, your non-exempt properties are sold by a bankruptcy trustee to pay a part of the debt. Chapter 13, on the other hand, allows the debtor to pay a part of the debt and erase the rest.
- Do your homework and thoroughly review your income and your debt. Even the smallest detail could make the biggest impact for you to get a realistic outcome on your situation. List every expense and create a budget.
- Educate yourself on all accounts of debt relief and the options available to you.
- If you cannot pay your mortgage or other monthly bills, contact your lender and try to work something out. If you cannot solve it with your lender then contact a housing consultant agency through the local office of the Department of Housing and Urban Development or the housing authority in your respective state, city, or county.
Consequences of Debt Relief
- Your credit takes a hit
When you enroll in a debt relief program, you should stop making direct payments to your creditors who will make late payment report updates to the credit bureau. This information will be recorded and stay on your credit report for seven years.
Bankruptcy information, on the other hand, will stay on your credit report for 10 years, which could make it difficult for you to find a job, home, apply life insurance, or get credit.
However, this is a legitimate way of debt relief.
- Hidden fees and the cost
Debt relief companies charge you a lot. You will generally end up paying between 18-25% of the total debt for the company.
- You might have to pay taxes
Say you were able to lower your debt from $10,000 to $5,000. This becomes a taxable income that is higher than $600. In other words, you will be paying taxes.
Your creditors can file a debt collection lawsuit against you.
- No guarantee
There is no guarantee that debt relief companies will be able to settle your debts. The worst-case scenario is, you end up having more debt than you originally started with.
Summing it up
Each and every option has its own ups and downs. You should figure out what’s best for your situation and proceed. Keep an eye out for scammers who are eagerly waiting to separate you from your hard-earned money. When in doubt, always reach out to legal professionals.
At Ascent Law Firm, we fully understand the nuances of debt and bankruptcy legalities. We are a full-service bankruptcy agency for Utah and surrounding areas. If you have any questions or would like to schedule a call, please reach out to us here today.