Finding yourself with more debt than you realized and wondering how to right the ship? You’ve come to the right place! Debt solutions vary and ultimately come down to each debtor’s specific situation.
Below we’ll outline the basic debt relief approaches and which situations are ideal for whom, so you can leave debt behind once and for all. Let’s get started.
Taking the DIY approach to solving debt could include taking a debt management course, consolidating debts, or a restructured debt repayment plan.
All these options result from a debtor being proactive. Call your creditor(s) at the first realization that your debt might be spiraling out of control. Be as transparent as possible about your situation. Leaving creditors in the dark and then missing payments will only make things worse.
There aren’t really any cons with the DIY approach because there’s nothing to lose in asking for help, especially before you start to miss payments.
Who Qualifies for the DIY Approach?
The DIY approach only works for debtors who are at the early stage of falling behind and can still make payments on their debt. In other words, someone who still has options.
Working with a Debt Settlement Company
Debt settlement companies attempt to negotiate with creditors to reduce the overall amount of debt you owe. For any debt they settle (and you agree to pay) you’ll be charged a percentage fee by the company.
While a debt settlement company is negotiating on your behalf, you won’t be making payments on your debt. This will hurt your credit score, but the idea is to save up enough money to settle your debt for a fraction of what you owe.
Debt settlement typically takes two to four years to play out. Be aware that any forgiven debt is taxable by the IRS. Thus it’s important to make sure that debt settlement fees and tax obligations end up being cheaper than your initial debt amount, otherwise you’re no better off. This is what a company like Freedom Debt Relief does. Debt settlement can be advantageous because it offers debtors professional support during an uncertain, stressful time.
Who Qualifies for Debt Settlement?
Debt settlement providers generally work with at least $10,000 of debt, but rare exceptions exist. On a broad level, anyone who can’t make headway on a growing debt sum may be a candidate for debt settlement or bankruptcy. You could of course also do nothing, which offers the worst of consequences by far.
There are two different kinds of personal bankruptcy, Chapter 7 and Chapter 13.
- Chapter 7 discharges all your debt, but you also lose all your assets.
- Chapter 13 allows a debtor to keep their personal assets as long as they can make court-ordered payments for three to five years. The amount of those payments, as well as how long you’re required to make them, hinges on whether your income falls under or over your state’s applicable median.
Both Chapter 7 and Chapter 13 bankruptcy will impact your credit score for up to seven years, but future creditors may look more favorably on a Chapter 13 bankruptcy because some debt was repaid over a period of time.
However, many debtors don’t factor in the filing fees, financial management courses and lawyer costs that come with filing for bankruptcy. These costs can range anywhere from $1,500-$4,000 depending on what you file.
Who Qualifies for Bankruptcy?
Only debtors earning less than their state median income on a monthly basis can qualify for Chapter 7. For Chapter 13, aka the “wage earner’s plan” you must have sufficient income (after subtracting required payments on secured debt like a mortgage or car loan) to qualify.
Not every debtor has all these options available to them, but debtors with less than $10,000 in debt and who are able to make more than the minimum amount on their payments probably have options and should only consider the DIY approach. Debt settlement and bankruptcy can be worthwhile when financial situations have truly spiraled out of control, but the extra costs and credit score damage are too great to bear if you can restructure or consolidate your debts to a monthly amount you can manage.
Whatever you do though, do something. The only inexcusable way to handle debt is to let it get worse. Keep the above information in mind as you create a plan to tackle your debt once and for all. We’re rooting for you!