2021-07-15
Debt is a situation that no one wants to be in. Even after trying to carefully manage personal finances, life can bring upon unexpected circumstances, and force people into debt. Without a doubt, getting out of debt is a difficult task to deal with, but it can be done. In this article, we will discuss some of the common debt relief strategies.
Credit Counseling
When an individual becomes indebted, the first step to relief is to become involved with a credit counseling program. Meeting with a counselor is a good way to begin the process out of debt. They will give their perspective on your specific situation, and discuss the best process to return to financial stability. Credit counseling services are very affordable and often free, and available from various companies.
Debt Management Plan
Individuals enrolled in credit counseling may opt to participate in a debt management plan. A debt management plan is a repayment method handled by a non-for-profit credit counselor. A monthly payment is made to the counseling organization, and they will repay your debts. The benefit to this approach is that counseling services have agreements with creditors, and they often can waive fees and lower interest rates. An additional advantage is that you will not have to deal directly with debt collectors. While there is a small fee for these programs, the convenience and simplicity of debt management plans is worth it for many individuals.
Avalanche Method
Known as the avalanche method, this is a basic strategy to gradually pay off debts. The concept is to make the minimum monthly payments for each debt, and put any remaining money toward the liability with the highest interest rate. Once that has been taken care of, the one with the second highest interest rate is paid off, and so on.
Snowball Method
The snowball method of paying off debts functions differently than the avalanche concept, as the first liability to be paid off is the smallest one. When using this strategy, the only thing considered is the value of the debt - interest rates are not a factor. The snowball method works for some individuals as the smallest liability is paid off rather quickly and it acts as motivation to continue tackling the others.
Debt Consolidation Loan
For people who have many different debts, obtaining a consolidation loan is a viable solution. Banks, credit card companies, and other lending institutions usually offer applications for consolidation loans. These loans have much lower interest rates than the money you owe. The borrowed money is then used to take care of your outstanding debts. If possible, an unsecured loan is ideal, as you do not run the risk of losing personal property due to missed payments.
Debt Settlement
A debt settlement is a negotiation with the person or company who is owed money. Often, the indebted individual offers to pay a portion of the debt, if the rest can be forgiven. To do this, though, one must have a substantial sum of cash in hand. Reaching a settlement may take some bargaining with the lender, but in the end, can help save substantial money.
Balance Transfer
As a way to attract new customers, credit card companies offer balance transfers. After signing up for a card, the company will be able to transfer the outstanding balance from your old credit card to the new account. This can come with a small fee, but as a promotion, some companies do it for free. Additionally, the transferred debt will now have either lower or zero interest for a set amount of time. Doing this can make it easier to pay off other debts, due to not worrying about accumulating interest on a credit card bill. It is important to note that missing payments on the new card may bring high fees or an increased interest rate. Reading the fine print of the transfer agreement will ensure there will be no unexpected charges that could increase your debt.
Cash-Out Mortgage Refinancing
Another way to tackle debt is to refinance your house. For those who have a mortgage, the lender will give you a sum of money in exchange for an increase to the mortgage balance. This means either higher future monthly payments or an extended term, but the trade-off is worth it in some cases. Before choosing to do this, remember that your home is collateral for the loan, and can be taken away if enough payments are missed.
Declaring Bankruptcy
When other debt relief strategies are not able to help you, it may be necessary to declare bankruptcy. Doing so is a major ordeal, and it should be handled by a bankruptcy attorney. There are two types of bankruptcies filed by individuals - Chapter 7 and Chapter 13. Chapter 7 is when many of your personal assets will be sold to pay off any debts that are not forgiven. Depending on where you live, some possessions cannot be sold due to state regulations. It is important to note that a person can only declare Chapter 7 bankruptcy once every eight years. Chapter 13 is different, in that a three to five year plan is arranged to pay off remaining debts. Your bankruptcy attorney will assist with deciding which route to take, as each situation varies. Either way, declaring bankruptcy is not something that should be done unless absolutely necessary.
Judgement Proof
People with very low or no income, and who have no assets for collateral, are considered judgement proof. This means that debt collectors are not able to take anything from them. Money these individuals earn from government benefits, such as social security, is protected income that cannot be collected. If you are considered judgement proof and are being harassed by creditors, LASPD can help. Visit our website for more information.
