What Should I Do? | Debt-Relief Options

When stress becomes turmoil

Feeling stressed about money? You are not alone. Most people have money worries of one kind or another. Sometimes an unexpected expense keeps you awake at night and all you need is a quick payday loan to tide you over. But when your financial situation becomes unmanageable and temporary stress turns to lasting turmoil, it’s time to do something more.

Make a plan and stick with it

There are a number of effective debt-relief options that can give you a fresh financial start. Regardless of which kind of payment plan works for you, it is important that you be realistic about the amount you can afford to pay every month, because the key to your success will be your ability to stick with the plan.

Debt Counseling and Debt Management

This option will help you understand the effects of your spending patterns and help you to live on a realistic budget. There are many kinds of do-it-yourself debt management programs, but unless you are highly disciplined, it may be better to work with a debt management company.

Lower your interest rates and pay your debts in full

After helping you create a realistic budget and repayment plan, these companies work with your creditors to lower interest rates, stop late payment fees, and reduce and consolidate monthly payments. The goal is to pay off all your debts by combining them into one manageable payment that you’ll be able to make on time every month. Debt management programs generally take three to five years to complete.

Debt Settlement

Debt settlement involves negotiating with creditors to get them accept partial lump sum payments in return for writing off portions of your debts. When you choose to work with a debt settlement company, you stop paying on your debts (creditors generally will not settle a debt until you are several months behind on payments) and instead start making monthly payments to the debt settlement company.

Reduce your debts and pay them off one at a time

The company holds your money in a special account until enough has been saved to pay off a creditor. This process is repeated, paying one creditor at a time, until all your debts have been paid. Debt settlements usually need to be completed within three years.

Debt Consolidation

Debt consolidation involves taking out a new loan to pay off old debts. The benefits include a lower interest rate, a fixed interest rate, and the convenience of making just one monthly payment until you are out of debt. Debt consolidation can include many kinds of unsecured (e.g., credit card and medical) debts, but not secured (e.g., home or car) loans.

Get a good rate on a new loan to pay off old debts

Sometimes the new consolidation loan is unsecured, but more often it is secured by a mortgage on your house. The pledging of a mortgage or other security for a debt consolidation loan is what allows you to obtain the best interest rate and pay your debt off more quickly. If you own your home, consolidation may be an attractive alternative.

A word of caution about mortgaging your home

The decision to consolidate should be made carefully. If you are unable to make the new loan payments, consolidation may adversely affect your ability to discharge debts in bankruptcy. To learn more about your bankruptcy options, read What Should I Do? | Bankruptcy.