Being responsible with money doesn’t come naturally to everyone. People make mistakes, especially early on in life. That could include overextending yourself on credit, missed or late payments that raise your interest rates, and ignoring missteps until they get you deep into debt.
Unexpected events, such as a medical emergency, loss of employment, or something else major, can also take a toll on your finances.
When debt becomes too much to handle, dealing with it can feel overwhelming.
Luckily, there are several options for debt relief that can lend a necessary hand in correcting the course of your financial life. Here are five of the most common debt relief solutions to help you overcome substantial debt.
1. Debt consolidation
When you find yourself drowning in debt from credit cards, loans, or otherwise, debt consolidation can be a practical solution to get your financial situation back under control.
With debt consolidation, you typically transfer all of your balances to a new loan or a single credit card to pay off as many outstanding debts as possible. Then pay as much as you can on that one account each month instead of trying to manage a bunch of them simultaneously.
Ideally, you would transfer them to a low-interest personal loan, credit card, or other line of credit with an average annual percentage rate (APR) lower than what you currently pay across your accounts. Achieving a lower APR across the board isn’t always possible, but that doesn’t mean you shouldn’t consolidate your debt anyway.
Sometimes we must make choices based on our known money-management habits and choose the path where we’re most likely to succeed, such as paying only one account rather than trying to stay on top of several.
– Consolidating debt with a credit card
Credit cards are revolving credit lines that typically have variable interest rates and often carry an annual fee. If your interest rate rises, the monthly payment required to pay it off by your target date will also increase.
Using a credit card to combine multiple debts into one can be a struggle for a lot of people. It can be hard for people to resist using credit when it becomes available on the card, especially those already struggling to pay their bills.
You’ll have to commit to paying more than the minimum payment each month and stop spending on it if you want your balance to go down at a decent pace. Otherwise, it can take decades to pay off.
Consolidating with a home equity line of credit is similar, but can be cheaper if you’re lucky enough to own a home with equity.
– Consolidating debt with a loan
A debt consolidation loan can be a better solution for people struggling to manage their credit cards and other debt. Most debt consolidation loans are just personal loans used to consolidate debt. However, you can also refinance your home and get cash back, obtain a home equity loan, or borrow money elsewhere to pay off your other balances.
The benefits of taking this route toward debt relief typically include a fixed interest rate and predictable monthly payment, a precise payoff date, and the inability to reuse the credit. Instead of paying multiple debts with varying fees every month, you can make one payment to your new consolidation loan.
With either method, the sooner you begin the process, the better. If your debt and credit score continue spiraling out of control, there will be a point where it will feel nearly impossible to consolidate your debt on your own.
2. Credit counseling
If you continue struggling to manage your debt on your own, another option is to seek the help of an approved credit counselor. A reputable credit counselor can help you create a personalized financial plan and budget based on your income, needs, and goals.
Certified credit counselors can help with debt collection, budgeting, credit report review, financial education, bankruptcy, and housing. Look for government programs, non-profit agencies, and for-profit companies accredited by organizations such as the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
The best credit counseling organizations will offer an initial consultation and assessment for free, then only suggest paid solutions such as a long-term debt management plan, debt consolidation, or additional counseling if needed.
3. Debt management plan
Under this type of debt relief, an experienced credit counselor works with your creditors to develop a repayment plan. That typically includes reducing interest charges during the repayment period and making a single monthly payment to the credit counseling agency.
Unlike debt settlement, which requires you to be behind on some or all of your payment obligations, debt management plans allow you to continue making on-time payments so you don’t have to destroy your credit first. However, you will likely be required to close your credit lines when enrolling in a debt management plan, which could temporarily lower your credit score.
Any unsecured debt, such as debt not secured by assets like your vehicle or home, may be eligible for a debt management plan. While you still agree to repay your debts in full, the reprieve from interest lowers the total cost of debt over time, making payments easier to manage.
Working with a professional on your debt management plan often requires an initiation fee and a monthly fee, so it is essential to understand the total cost before signing up.
4. Debt settlement
Depending on your situation, debt settlement may also be a viable solution for debt relief. Also referred to as debt negotiation or resolution, settling debt requires you or a professional, such as National Debt Relief, to negotiate a lower monthly or lump-sum payment with each of your creditors.
Negotiating debt down through settlement allows you to reduce the total amount of money owed and create a plan to eliminate the rest of the debt in a shorter timeframe.
Hiring a professional to settle outstanding debts is often a wise choice given their experience in dealing with creditors. Top companies can even get some of your debts immediately dismissed with a cash reward back to you. Their legal professionals can identify violations of the law committed by institutions and exploit those infractions to your benefit.
Working with a debt settlement company often comes with costs, so it is important to weigh the pros and cons of this option and alternatives before taking this step. Most debt settlement businesses will offer a free initial consultation and charge a commission when you sign up for their program. You can also try to settle your debt on your own for free.
5. Bankruptcy
The last resort in finding debt relief for individuals and married couples is filing bankruptcy under either Chapter 7 or Chapter 13. Bankruptcy is ideal for those who are so deeply in debt that they see no feasible alternatives.
With a Chapter 7 bankruptcy, you work through the court system to discharge your eligible debts, effectively wiping the slate clean. Under a Chapter 13 bankruptcy, you create a 3 or 5-year repayment plan that eases your total debt obligation.
Bankruptcy will remain a blemish on your credit history for up to 10 years, making it an option generally reserved for those who are seriously delinquent. Chapter 7 will stay on your credit report for 10 years, while Chapter 13 lasts for 7 years.
However, it can be the fresh start you desperately need. You can begin rebuilding your credit immediately after bankruptcy and may get approved for an unsecured personal loan, auto loan, home mortgage, or credit card within the first few years.
The co-author of this page, Wesley LeFebvre, filed for Chapter 7 bankruptcy many years ago when the real estate market crashed. He says it was one of the best things he could do for his life at that time. He now maintains an 850 credit score.
While it is possible to complete the bankruptcy process on your own, it’s best to have an experienced attorney handle it. The process could present numerous difficulties and take substantial time to complete, depending on the complexity of your situation. Having an attorney’s assistance can also help you emotionally during this trying time.
Final thoughts on getting debt relief
Debt shouldn’t consume your life to the point that you have a mental breakdown. Instead, you can utilize one of these top debt relief options to ease your mental health and the burden debt payments have on your finances.
Before taking a drastic step toward debt relief, take the time to reflect on your financial history and commit to doing things differently moving forward. The only way any of these options will benefit your future is if you’re committed to better financial responsibility.