When you find yourself overwhelmed by debt, there are many options available that can provide solutions for paying it off and learning how to better manage finances. Each program offers a number of advantages and disadvantages and most options have qualifications that must be met. As a result, finding the right solution is as much about determining suitability, as understanding the available programs that exist.
The options best for you are based on the following:
- Quality of Your Credit
- Assets You Own
- Level of Debt
- Level of Financial Discipline
- Potential for Future Income
- Quality of Credit. If you are current on your bills you may have options that require qualification based on a higher credit score. When payments are over 30 days late, and/or balances are close to or over the limit, your credit score will fall rapidly. Your credit score and credit report will impact which options you might qualify for.
- Assets You Own. Owning a home or other asset of value may provide equity that may be used to secure a loan. This might result in better interest rates and lower payments. While your credit must be good enough to qualify for a loan, it offers additional options for a financial solution.
- Level of Debt. The total debt and the ongoing monthly payments impact your ability to keep up with the debt. If you are at your limit on every card and unable to make minimum payments on time, you require immediate relief eliminating long term, slow recovery strategies.
- Level of Financial Discipline. Some consumers have good financial discipline but may well find themselves drowning in debt due to job loss, health issues or other unforeseen events. In these cases it might be possible to set a strict budget and be disciplined enough to stick to the budget for several years. This will provide debt relief over an extended period of time, but accounts will be paid in full.
- Income in relation to the debt payments, along with fixed payments like housing and utilities will factor into finding the best solution. Your ability to cover basic expenses and having enough left over to cover debt payments needs to be determined before a financial strategy is selected.
- Potential for Future Income. Are you able to get a second job? Do you have a job loss, which will be short lived as soon as you find more work? Are you retired with little hope of your income increasing? Does your health prevent you from gaining additional or higher paying work? These questions need to be evaluated to determine the financial solutions that will meet your short and long term needs.
Financial counselors review the details of your debt including who you owe, how much is owed and at what interest rates. They also seek to understand your complete financial picture before making recommendations. This will help them determine which programs you qualify for and which are best suited to provide both immediate and long term relief.
Possible Programs Include:
- Doing It Yourself
- Debt Consolidation Options
- Debt Negotiation Options
- Credit Counseling
Do It Yourself entails organizing debts and setting a strict budget. It may include taking a second job to increase income along with reductions in spending. Debt can be paid off by making the minimum payments on all credit cards except one. Make all additional payments to the one card until it is paid off, then add that payment to the next card. This strategy requires you to live below your income, in order to make progress on debt reduction.
- Debt will be paid off in full
- You will gain the skills needed to prevent future debt problems
- Over time your credit will improve
- Can take many years depending on how much extra you are able to pay each month
- Interest rates are not reduced and there is no immediate relief
- Late fees and collection calls will continue
Debt Consolidation Options include taking your debt payments and rolling them into one payment. This might be at a lower interest rate and the payment could be either larger or smaller depending on the payback period. This strategy will result in the cards consolidated being closed and a re-set on payments.
- Lower interest rate
- Potentially lower payments if payoff is extended
- Credit will improve as payments are made
- Must qualify for the loan with a high credit score
- Often must convert unsecured debt to secured debt
- Payments can extend to 20 or 30 years
Debt Negotiation Options generally result in lower debt payments and lower total balances paid. The strategies offer immediate relief through lower monthly payments and will generally pay off the debt within3-5 years of signing up for a program. Payments made to the credit card company are negotiated meaning you pay less than what you actually owe . This feature enables you to pay off your credit card debt faster.
- Immediate relief with lower monthly payments
- Become debt free in around 5 years
- Are not required to pay the full balances plus interest and fees
- Credit score will initially decline but then will rise as debt is paid off
- Will be unable to use credit cards enrolled in the program
- Must have a financial crisis to qualify
Credit Counseling offers an educational element to paying off credit. You will be required to take classes on budgeting and learn about money management. This will give you the skills needed to prevent future debt problems. Counselors will also negotiate lower interest rates and set you on the path to becoming debt free in around 5 years.
- Holistic approach to debt relief teaching money management skills
- Interest rates are lowered on some or all credit cards
- Balances will be paid off in full in around 5 years
- Little or no reduction in monthly payments
- Creditors may refuse to lower interest rates
- Cards enrolled will be closed
Bankruptcy is the most severe step when looking for debt relief. This process will either restructure payments or eliminate debt through a bankruptcy discharge. When this happens your creditors are not paid and you are given relief from your legal liability to pay. The bankruptcy will remain on your credit for up to 10 years and will make it difficult to gain additional credit.
- Relief from debt payments, as the debt is discharged
- Credit cards, medical debt and collections can be included
- Collection calls are stopped
- Credit is damaged for up to 10 years
- Many creditors will not offer credit due to the bankruptcy
- Must qualify with severe financial hardship
Finding the most suitable debt relief program is the goal at Strategic Consulting. Our trained counselors will look at every aspect of your financial life and make the appropriate recommendations that will bring you relief and the ability to become debt free.