For most people, sustaining unsupportable debt can be a single incident away. Maybe you lost a job and it took too long to find another one. Perhaps there was medical emergency for which you had neither insurance nor savings. Or, a natural disaster wiped out your home and your business completely.
Whatever the cause, taking control of your financial future back will involve availing yourself of some form of debt relief. These will usually be debt consolidation, debt management, debt settlement or bankruptcy.
If you catch the situation before your credit rating is adversely affected you might qualify for a debt consolidation loan. However, this can sometimes involve trading unsecured debt for secured debt. Unsecured debt like medical bills and credit card obligations are loans requiring no collateral. Secured debt means you’ll offer something of value (usually real property) to assure the lender you’ll repay the loan. If you can’t keep up the payments you could potentially lose your home.
In a debt management program, you’ll work with a credit counselor to assess your situation, develop a budget and work out a payment plan with your debtors. The counselor will negotiate terms with your lenders, often securing you a reduced interest rate and fee waivers. Your credit score will take less of a hit because the principal loan amounts are repaid in full. The counselor makes payments against your debt, using money you will deposit into an account every month.
Here, you have to be careful to confirm the terms of the deal the counselor negotiates with each of your creditors. It’s OK to trust, but you definitely want to verify. If all goes according to plan (depending upon the amount you owe, as well as what you can afford to pay each month), your debts could be settled within 48 months or so. However, you have to be certain you can keep up the payments. You could wind up in a much more serious situation if you default on the plan.
Debt management and debt settlement are similar in that you’ll work with a third party who will negotiate with the organizations you owe on your behalf. However, debt settlement firms work to get lenders to forgive part of the balance owed—as well as all accrued fees and interest. Debtors often agree to this because they know you’re one step away from filing for bankruptcy protection, which could mean they won’t get paid at all.
You’ll make monthly deposits into a fund with debt settlement too. However, rather than making regular payments against your obligations, this fund will be used to settle your debts. As a result, delinquencies continue to mount until the fund has accrued enough money to start paying the negotiated settlements and your credit rating will continue to deteriorate. When the agreements are satisfied, your loan history will show “settled” debt for seven years—from the date the debt is reported as settled.
To choose a reputable settlement company, your due diligence should include studying debt relief reviews, consulting Better Business Bureau ratings (accepting only a high ranking) and looking for accreditation by respected organizations like the American Fair Credit Council.
When it comes to taking control of your financial future back, bankruptcy is the legal equivalent of the “nuclear option”. Yes, your debts will be discharged and you can start rebuilding your monetary situation sooner. However, your credit score will be shot and the likelihood of anyone giving you a loan for at least 10 years is only slightly above zero. The only time you should consider bankruptcy is when you are absolutely unable to pay and your home, car and future livelihood are in peril.
Remember to weigh your options before taking control of your financial future.