Living with debt is a daily reality for most Americans. As prices for basic goods like shelter and vehicles increase, it is becoming harder for many individuals to afford the cost of daily living without resorting to borrowing.
Others simply borrow money because they do not have enough saved up to cover larger expenses like homes or college. Although living with debt is difficult, however, there are several options available to those seeking relief from debt.
Although many individuals think of debt as a purely negative subject, it is important to differentiate between good debt and bad debt. In many cases, debt is important for an individual’s future financial health, as it can provide the borrower with more money in the long-term. Student loan debt and mortgage debt, for example, allow borrowers to pay for certain products that will generally increase in value over time, thus providing long-term income benefits.
Unfortunately, not all debt offers the same rate of return as college education and mortgage debt. In fact, many types of debt do not add any value to the borrower’s life and carry high interest rates that make it difficult to pay back the debt. Credit card debt and debt from payday loans, for example, have high interest rates and do not offer any benefit beyond allowing the borrower to pay for a product immediately.
There are several debt relief options available to those who are having trouble managing their debt. However, these options should be considered carefully, as there is no way to get out of debt quickly. Many popular debt relief options come with significant drawbacks and may not be right for everyone. Furthermore, because individuals who owe substantial amounts of money are often desperate to get their debt under control, there are many debt relief scams that seek to take advantage of them.
Many debt relief programs require borrowers to pay fees, and if these borrowers do not complete these programs, they end up with more debt than they initial had. Therefore, it is important for those seeking debt relief to carefully research the options available to them and understand the potential drawbacks that can come with those options.
Some individuals incur substantial debts as the result of an unforeseen emergency like a natural disaster, the loss of a job, an expensive accident, a death in the family and more. However, others acquire a large amount of debt due to bad habits or a lack of financial knowledge. Still others accumulate debt due to identity theft, but this is a special case with its own solutions. Therefore, it is important for those looking to get out of debt to gain financial education and cultivate good spending habits.
When it comes to getting out of debt, the method with the fewest drawbacks is simply to pay the debt off as scheduled and avoid incurring more debt. Individuals in debt should only consider other debt relief options if there is no way they can continue making payments on their current debt, even by dramatically decreasing their spending in other areas.
Those who simply cannot pay their debt off by making the scheduled payments should look into other debt relief options. These include credit counseling, debt consolidation, debt resettlement and bankruptcy. Learn more about each of these options below.
One of the most popular debt relief options for those who find that they simply cannot cut spending enough to pay their loans off as scheduled is credit counseling. Under this program, those who owe money work with a nonprofit agency that reviews their debts, budget, income and other factors to help establish the best debt relief plan for them.
Although these agencies seek to offer the best solution to your situation, the solution may not always be easy to follow through with, as there is no quick fix to your debt problem. However, credit counseling is usually the best place to start when seeking debt relief.
This type of debt relief, which is often recommended by credit counselors, seeks to decrease interest rates on your debt and make your monthly payments more manageable. Once you pay off the amounts through a debt management plan, your credit accounts will generally be closed, which can lower your credit score. However, you may open new accounts by applying for credit again.
If you are eligible for bankruptcy, it might be the best debt relief option available to you, so you should talk to a bankruptcy attorney before you consider other debt relief options like debt consolidation or resettlement. Bankruptcy can eliminate certain types of debt in a matter of months. However, it is important to realize that bankruptcy will not eliminate all types of debt and that it will significantly lower your credit score. This may make it difficult or impossible for you to acquire certain jobs or even to get an apartment. Filing for bankruptcy may also require that you give up vehicles (if you own more than one vehicle) and may require other sacrifices.
Although the terms “consolidate” and “settle” are often used interchangeably when it comes to debt relief, they describe two very different processes. Debt consolidation involves combining all eligible debt, such as payday loans and credit card debt, into one large debt.
Consolidating your debt typically allows you to make lower monthly payments and may even come with a lower interest rate. However, this process will typically leave you paying a higher total amount for a longer amount of time, as your monthly payments will be divided over a longer period. This will make your monthly payments more manageable, but it will increase your overall debt.
Debt settlement should only be pursued as a last resort. Under debt settlement, a for-profit settlement company instructs you to stop making payments on your debt and instead put your payments into an account that is controlled by the settlement company. The company then attempts to leverage your months of unpaid debts and pressure your lenders to accept a smaller lump sum payment. This lowers your credit score. If your settlers refuse, you will need to pay back your loans, along with any late fees, and you will typically not be able to get a full refund from the settlement company for the money you put into its account.