Feeling overwhelmed by student loan payments, credit card bills, or any other form of debt? Worry no more because there are things you can do to get your financial responsibilities under control. Known collectively as debt relief, these strategies can help alleviate your financial burdens by changing the terms and amount of debt you have.
However, as much as they can rapidly help you get back on your feet, it is essential to note that it has both pros and cons. Thus, going through the different forms will help you understand which one works better with your debt situation and, most notably, when to seek debt relief.
What Is Debt Relief?
Debt relief refers to the strategies and measures taken to reduce debt with the primary purpose of making it easier for the debtor to repay.
This can take several forms, for instance.
- Lowering the interest rate on loans due
- Partially or fully reducing the outstanding principal amount
- Extending the term of the loan.
- Debt settlement
- Credit counseling
- Debt management plans
- Consolidating debt
- Loan refinancing
- Changes to credit card or loan repayment terms
You can also consider filing bankruptcy as a form of debt relief. However, it comes with significant credit score impacts. Hence, while it can happen in different forms, the end goal is the same as its purpose is to help people or debtors find a workable path towards debt elimination.
When to Seek Debt Relief
Debt relief is not for everyone, especially for people who continue to add debts on top of existing debts, are not committed to repaying debts and create more new debts. Therefore, before choosing a strategy, it’s important to ensure you first understand the situation it suits best. You may seek debt relief when:
- You are struggling to afford your payments even though you are not yet behind on bills
- You are already behind on credit card bills and other loan payments.
- You have considered filing bankruptcy
- You have tried to manage your debt on your own but failed to make any progress
The options of filing bankruptcy, debt settlement, or debt management should only be considered when the following happens.
- Half of your gross income equals the total of your unpaid unsecured debts
- Even after taking extreme measures to cut your expenditure, you still have no hope and means of repaying the unsecured debts within five years.
Some of these unsecured debts include personal loans, credit cards, and medical bills. However, if you can potentially repay your unsecured debts within five years, you may want to consider a do-it-yourself repayment plan. For instance, a combination of debt consolidation, petitions to creditors and stringent budgeting. You can learn more about this at https://www.bills.com/.
Furthermore, in many situations, debt relief may serve as the only way to avoid bankruptcy. Suppose a large debt appears problematic to service borrowings, for instance. In that case, creditors may be open to restructuring the debt and providing relief rather than risking the debtor defaulting his repayment obligations and, in the process, increasing overall credit risk. A good example of this is refinancing a mortgage to a lower interest rate.
Debt consolidation and combining several high-interest loans into a single low-interest loan are other common forms of debt relief. There are many ways consumers can lump debts into one payment. For instance, consolidating all their credit card payments into a single credit card, which charges little or no interest at all during the introductory period, or utilizing an existing credit card’s balance transfer feature, especially one that offers a special promotion on the transaction.
Home Equity Lines of Credit
Another form of debt consolidation people seek is Home Equity Loans and HELOC (Home Equity Lines of Credit). The interest for this type of loan is usually deductible for taxpayers, especially those who enumerate their deductions. Also, the federal government offers several options for people interested in consolidating their student loans. Nonetheless, there are different rules related to declaring bankruptcy, all of which is dependent on your type of debt. Thus, if you consider filing for one, make inquiries from a qualified lawyer in your state who specializes in bankruptcy laws to advise you on what measures to take.
The Bottom Line
If debts are weighing you down, this approach can help ease your burden. However, it is crucial to understand when to seek debt relief, what you hope to get from it and how it can help make your life better. All these are critical when choosing the right solution.