What Are the Different Types of Debt Relief Options

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debt relief programs

If you are in debt and see no end in sight to your current situation, you might want to take a step back and examine your available options in paying off your debt.

Many of us go the usual route of paying it for years down to the last cent. However, do you know that there are other possible options available for you? Yes, these debt relief options and take different forms. Let’s discuss each one in this blog post.

Debt Consolidation

Debt consolidation is probably the most common route people take when paying off debt. In debt consolidation, all your debts from several accounts are combined and paid with a single loan, that is large enough to cover your total debt amount.

Typically, a debt consolidation company will offer a smaller interest rate than what you would have paid for if you pay each of your account on your own. In debt consolidation, however, your total debt amount remains the same – only the interest rate is reduced. The logic is that by having a reduced interest rate, your total payments will be reduced as well as the time you’ll have to spend paying off your debts.

Credit Counseling

In credit counseling, a debtor sits down with a credit counselor who will review your current financial situation and then work out a possible repayment plan, often called a debt management plan (DMP). Credit counselors also educate you how to handle your finances while you’re in debt. Depending on your situation, a credit counselor may advise you to take either a softer or more aggressive approach to paying off your debt. Note that not all credit counseling services are free of charge. There are both non-profit and profit agencies.

Bankruptcy

This is often considered the last available option in paying off debt. It is because it has the worst effect on your credit score, not to mention, the stigma that comes with filing bankruptcy. In bankruptcy, you are considered insolvent or no longer able to pay. Depending on the type of bankruptcy you are filing for, either Chapter 7 or Chapter 13, a bankruptcy court may choose to seize your properties and erase the qualified debts, or have you keep your properties and give you a debt repayment plan and timeline.

Debt Settlement

Considered to be the most aggressive debt payment option available, debt settlement seeks to reduce not just your interest rate, but your actual total balance. Typically, debt settlement can make big cuts in your balance, from 40%-65%. If, for example you have $10,000 balance on a credit card, a debt settlement company may be able to reduce it to $4,000 or in other cases, even less.

In a debt settlement process, a debtor seeks assistance from a debt settlement company, who will negotiate with the creditors on his or her behalf. Depending on the total balance you are aiming to pay off, the debt settlement company will recommend how much money you will save on a third party account each month. Once you have enough available savings in your account, the debt settlement company will start the negotiation process and will contact you when a deal is closed on your behalf. Debt settlement may have a negative effect on your credit score, but if your debts are causing you too much stress and sleepless nights, the credit score will only seem a little price to pay.

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