Debt relief can ease the burden of overwhelming debt, but it's not right for everyone. Here are options to explore.
Debt settlement or debt arbitration, is a legal process used by both people in debt and their creditors to negotiate a settlement of an existing legal debt. This proactive approach is the most cost-effective option to pay off your current debt while avoiding the negative effects of bankruptcy. Any person owing credit card debt, or any other debt, has the legal right to contact and negotiate with the creditors. This practice however, takes time to master and certain skills to get the maximum benefits. A reputable debt settlement firm will work diligently and professionally with your creditors on your behalf to reduce your current unsecured debt balances down for less than what you owe by arbitrating an agreed settlement amount with your creditors.
Debt settlement is an appropriate option for people who may otherwise be considering bankruptcy due to some type of hardship. Creditors are usually willing to settle for less than the amount owed when a person is under financial strain because if the person is forced to declare bankruptcy, the creditors receive nothing. A debt settlement firm will assist clients by establishing an affordable monthly savings goal to save money for the settlement of the debts. Ultimately as each account is settled, the creditors will consider the accounts paid with a zero balance. A debt settlement program will have a short-term adverse effect on your credit during the program which may affect your ability to apply for new credit while your accounts are being settled. Once debt has been paid off through a settlement program, a client is then free to rebuild a solid credit profile without the burden and stress of outstanding debt.
Our team of specialists work individually with each client to help determine the program best suited for their particular situation and personal goals, and will refer them to the appropriate company best able to service those needs; giving them the best shot to overcome their financial situation, and accomplish their goals. Your debt settlement service provider will help you come up with an affordable monthly obligation, which is determined on a client-by-client basis between you and the debt settlement company. Based upon what you are able to pay each month into your settlement account, they can determine how many months you will be part of their program, and ultimately be free from credit card debt. Throughout the program, the debt settlement agency will communicate with your creditors on your behalf and soon you will no longer be dealing with burdensome phone calls and letters from your creditors. Debt settlement companies are independent companies not affiliated with your creditors which means they work directly and 100% for you!
Many credit counseling companies offer their services through local offices, on the Internet, or on the telephone. Under a consumer credit counseling program through a reputable CCCS firm, your creditors may be willing to reduce your interest rates and waive over-the-limit and/or late fees. You will make one payment each month to your consumer credit counseling firm, which will distribute the funds accordingly to the creditors. In return, you must agree to stop using your credit cards and not apply for additional cards or other lines of credit.
Many credit counseling companies have faced scrutiny for misusing their “non-profit” tax status and not providing the counseling and consumer education, as required. Although companies advertise themselves as “non-profit”, there is no guarantee that their services are free, affordable, or legitimate. In addition to making the monthly payment against your debt, credit counseling companies generally require upfront fees in addition to their regular monthly “maintenance” fees.
When researching a reputable credit counseling company, try to find an organization that offers in person counseling. Some universities, military bases, financial institutions, and friends and family may be good sources of information and referrals.
Be wary of credit counseling organizations that:
Require high up front or monthly fees for their program.
Pressure you for voluntary donations towards their program. These are simply disguised fees.
Do not disclose the negative consequences of their program on your credit.
Refuse to send you information about their services without first requiring you to give your personal financial information or account numbers.
Try to enroll you in a debt management plan the first time you speak with them without first reviewing your personal financial situation.
Offer to enroll you in a credit counseling program without providing you the required budgeting and money management education.
Demand that you make a payment towards their program before your creditors have agreed to reduce your interest rates and payments. How will you know if you can even afford it?
Debt consolidation is the solution people automatically tend to think of when facing problem levels of personal debt. At first glance, it makes sense to consolidate various higher-interest balances into one monthly payment at a lower interest rate. It sounds great in theory, but even after consolidating, many people often find themselves slipping deeper into debt and are merely borrowing more money to pay off debt. They’re just “buying time”.
There are essentially three types of borrowing methods available. There are debt-consolidation loans, balance transfers to another credit card, and home equity loans or lines of credit. While any of these methods may help some people get a handle on high interest debts, many others only find temporary relief and are right back where they started. In debt and in need of a real solution for paying it off. According to statistics, 70 percent of Americans who take out a home equity loan or other type of loan to pay off debt end up with the same or higher debt amount within two years.
Debt Consolidation Loans
Offers for these financial products may show up in your mailbox or e-mail everyday suggesting this as the solution to your growing debt problem. A major selling point of consolidation loans is convenience. Instead of paying multiple creditors who are charging different rates at different times of the month, you can potentially take out one big loan to pay off all your accounts.
The biggest myth about debt consolidation loans is that they’re easy to get. While these loans may promise a low rate and no-hassle solution, many people in debt don’t qualify for the advertised rate due to a high debt-to-income ratio or previous late payments on their credit report.
Even if you do qualify for one of these loans, it doesn’t automatically translate to savings. Before you sign on the dotted line, be sure that the costs of the new, bundled loan will truly be less than what you’re already paying various creditors. For many consolidation-loan candidates, their current credit woes mean they won’t get the lowest-available interest rate. Plus, when there is nothing to secure the loan (such as your home), expect the lender to bump up the rate.
Home Equity Loan or Line of Credit
Home equity loans or lines of credit are often advertised as a quick and easy way to get out of debt. By leveraging your home equity, the sales pitch goes, you can get money to pay off your debt and perhaps get a tax break as well.
While this option can work for some debt-burdened homeowners, borrowing against your house can backfire. Although you may be reducing your credit card payments, you now have a larger mortgage payment, for a much longer period of time. Over the life of the loan with all the additional interest, you will end up paying back your original debt many times over. With these types of loans you are converting unsecured debts into secured debts which ultimately leads to the biggest risk for a homeowner. If you run into trouble again and have difficulty making the payments on the new loan, you could risk losing your home to foreclosure!
Some people turn to low or zero interest credit cards to transfer debt. With this option, timing, discipline, and excellent credit are required.
Many credit card companies offer these rates as teasers – to lure you in to switch credit card vendors. Most of the time, these credit card companies target consumers with better credit. Just because you receive a pre-approved offer for a low rate balance transfer doesn’t guarantee that the rate will be lower or that you will even be approved at all.
If you do qualify for a zero-percent or low interest rate, that promotional rate won’t last forever. Most promotional rates increase significantly after 6 to 12 months which often leaves you once again with higher payments or struggling to find a new balance transfer offer.
Promotional interest rates only last if you pay on time. One late payment and the credit card company will jack up the rate. Also look for hidden fees and charges that can increase the actual cost of credit.
In most cases, the balance transfer game is a short-term fix. Many people find themselves merely transferring balances from one new card to another before each promotional rate expires. Opening new credit card accounts every six months, however, could negatively affect your credit rating. Very soon, those new credit card offers you depended on might disappear.