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    What Is Debt Relief?

    debt relife

    Debt relief refers to strategies that help you manage your debt obligations. When your arrears overwhelm you, choosing a relief option can bring you peace of mind and help you rebuild your credit.

    This relief can be as simple as consolidating all your arrears into a more manageable monthly payment or as far-reaching as seeking legal recourse to forgive all your outstanding balances.

    Here are some tips to help you decide which relief option is the best for you.

    When Should You Choose Debt Relief?

    At some point, you’ll assume outstanding balances. It’s a natural part of life. Very few people have the cash on hand to make major purchases such as a home or automobile. Arrears should be manageable. However, there are times when you’ll need help.

    Here are some warning signs:

    • You can’t sleep at night due to money stress
    • You’re using your credit card to cover daily necessities, such as groceries and gas
    • Your credit cards are maxed out or above the limit. The interest rate is also creeping upward
    • You’re not able to pay even the minimum due on your outstanding balances
    • Bill collectors are chasing after you
    • Your credit score is tanking
    • You can’t afford to save for emergencies and are living paycheck-to-paycheck

    Debt Consolidation

    Debt consolidation is the merging of all outstanding accounts into a single payment. This relief strategy is a sound approach if you simply need help organizing multiple bills and payment cycles. With a single monthly payment, you can quickly get a handle on your arrears and not worry about missing payments.

    There are two primary ways to consolidate your arrears. You can either get a balance transfer credit card or take out a consolidation loan. You could also take out a home equity loan if you’re a homeowner, but this option involves more risk.

    Balance transfer credit cards offer 0% interest for a promotional period. You transfer all your arrears to the credit card. Although, you’ll need to pay the balance in full before the promotional period ends.

    With a consolidation loan, you have immediate access to funds to pay off all your outstanding accounts. You’ll then only have one term installment loan that’s easy to manage.

    Debt Management

    Debt management involves setting up a repayment plan through a third party that negotiates with and pays your creditors until the balances are paid off.

    This plan typically lasts for three to five years, depending on the total of your liabilities. Moreover, all unsecured debt can be included in a management plan.

    Pros:

    • This management plan takes you out of the middle and helps you quickly gain control over your arrears. There will be less severe damage on your credit score that there would be with debt settlement or bankruptcy
    • Management plans get creditors off your back
    • You have a single monthly payment, enabling you to get out of debt more quickly

    Cons:

    • You must be ready to live on a cash-only basis for a while since your credit card accounts will be suspended
    • You’ll need to have the cash flow in your budget for several years to meet your commitment to the management plan

    Bankruptcy

    Bankruptcy is a legal process whereby you appear before the court and ask that your arrears be reorganized or discharged. The court can deny your request. Therefore, it’s advisable to retain the services of a bankruptcy lawyer or use the free legal services available at the courthouse.

    There are two types of bankruptcy, Chapter 7 and Chapter 13.

    Chapter 7 bankruptcy:

    • This is the most popular type of bankruptcy
    • You ask the court to release you from all outstanding payments
    • Essential assets such as the car you need for work, retirement savings, and your pension fund are protected. Non-essential assets such as a second home, stock investments, or additional cars will be sold to repay part of your arrears
    • Chapter 7 bankruptcy stays on your credit report for ten years

    Chapter 13 bankruptcy:

    • You repay some of your arrears and ask for other liabilities to be forgiven
    • To qualify, your total outstanding payments may not exceed a certain amount 
    • You and your creditors must agree to a two-to-five-year repayment plan. If you complete the plan, the remainder of the balance owed is erased
    • Chapter 13 bankruptcy stays on your credit report for seven years

    Watch Out For Debt Relief Scams

    If your arrears were already barely manageable, then the COVID-19 pandemic might have pushed you to the point of needing relief. There have always been relief scams, but today, scammers are taking advantage of everyone’s increased economic stress.

    Look out for these red flags when considering relief companies.

    • They ask for money upfront
    • The company guarantees that it can eliminate all your outstanding balances
    • They don’t inform you of the consequences to your credit score
    • They refuse to put their terms and fees in writing
    • They tell you to stop communicating with your creditors

    Bottom line

    All forms of relief have some impact on your credit score. However, defaulting on your liabilities will cause the greatest harm to your ability to secure financing in the future.

    Debt relief can be an excellent way to turn a new page and rebuild your credit.

    When deciding what relief option to choose, you must consider your ability to follow through with the plan. Many people fail to complete their reorganization plan. You’ll want to choose the relief strategy that gives you the best chance of success.