There are several different types of debt relief options out there. There is anything from a debt consolidation loan, debt settlement, a debt management program, a personal loan through friends or family, bankruptcy, and so on.
There are some drawbacks and advantages to each different kind. We will look at the three most popular ones, i.e., a debt management program, debt consolidation, and debt settlement. Bankruptcy should ALWAYS be the very LAST resort, so we are going to take that one off the table for now and focus on these three.
Debt Management Program –
A debt management program is the safest and most reliable route to take. Certified credit counselors can assist you in creating a money-spending plan and a realistic budget to help you handle the money you have. When the repayment of bills has become too difficult, some credit counseling companies may be able to offer a debt management program in cooperation with your creditors. If you agree to take part in a debt management program, you will be set up within that agency’s computer system, and proposals will be sent out to all of your creditors. The creditors will then review and approve the proposals with the concessions discussed during the credit counseling session, such as reduced interest rate and reduced monthly payment.
With debt management programs, you will be able to make one simple and affordable monthly payment to the credit counseling agency, which in turn will be disbursed automatically to your creditors in the agreed-upon amounts every single month. You are paying your creditors back each month so there is no need to worry about late or missed payments. It won’t negatively affect your credit score like debt settlement will. In a debt management program, late fees and over-the-limit fees are usually eliminated altogether. The credit counseling agency can usually reduce high-interest rates as well to help you pay off the debt at a much faster pace. This option will also save you the most money over time because of reduced rates and eliminated fees.
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Debt Consolidation –
Debt consolidation typically involves taking out a lower interest loan to pay off multiple high-interest secured or unsecured debts such as credit cards. The lowest interest rate consolidation loan is generally secured against the borrower’s assets such as a home or a car. Because credit card debts have such high-interest rates, even an unsecured consolidation loan can significantly reduce the borrower’s monthly payment.
With so many people upside down on their mortgages these days, using your home may not be acceptable security. If you are in such a situation, there is no need to worry because many lenders are eager for your business, even if you have less than perfect credit. When selecting a potential lender do some very thorough research and make sure that the terms of a consolidation loan are equitable and that the company is reputable.
Debt Settlement –
Debt Settlement appears to be far more risky than debt consolidation. Some experts who have studied the debt settlement model cannot even agree that it is legitimate. Using this approach can actually lower a borrower’s credit score by 65 to as much as 150 points. Even one missed or late payment can cause a negative credit report to remain on the borrower’s credit history for up to 7 years. Debt Settlement is usually performed by a for-profit company or agency, while Debt Mediation is done by the individual themselves. They both mean the same thing and have the same negative results.
Debt settlement companies can have many fees, which can make a deal unattractive for both the borrower and the claimants. Upfront fees are not supported by the Federal Trade Commission but debt settlement companies charge them anyway or they tack on a huge fee when you are finished with the settlement. These companies have also been known to keep your money in their accounts and wait until it’s a large enough sum to settle with the creditors. This is horrible because while they are collecting your money, they are not paying the creditors, and those creditors will report to the credit bureaus that you are behind on payments and may even send the account to a collection agency, which could have a terrible effect on your credit score. Debt settlement is dangerous and has many pitfalls. It seems more like an approach that would add to financial difficulty rather than relieve it. Most of the time, the person also has to pay taxes later on for the amount that was “settled” because the IRS sees that as “taxable income.”
Suppose you are in a bad financial situation due to high-interest unsecured debt such as credit cards. In that case, your first choice should be a debt management program offered by a non-profit credit counseling agency. Make sure the credit counseling agency has a good reputation, and they are members of well-known accredited organizations such as the National Foundation for Credit Counseling (NFCC) or the Council on Accreditation (COA).
When all else fails, there is bankruptcy but that should always be a last resort. Even bankruptcy seems like a better option than debt settlement most of the time. That is why a Debt Management Program should be at the top of everyone’s list for debt relief options. It just makes the most sense!