The Pros and Cons of 5 Most Common Debt Relief Options

If you’re battling mounting piles of debt, first, know that you’re not alone. Nonetheless, your best course is to take action immediately. Whether you choose to tackle your debt on your own or to seek debt relief, what matters most is to devise a feasible plan.

The path to financial freedom isn’t easy, but there are multiple debt relief options available to you if you want to chip away at your bad debt. Each option carries pros and cons, and not every course works for every debtor. The key is to work closely with your creditor and a financial partner like a debt relief agency to help you navigate the process and seek financial freedom as quickly and effectively as possible.

Here are the five most common debt relief options available to consumers like you.

The Options

Consumers generally choose between five primary debt relief options. Each option leverages cooperation from either private lenders, the federal government, nonprofit organizations, and credit card companies.

Keep in mind that while these options can lead you to financial freedom, many do come at a cost, most notably, a severe hit to your credit report and history. That said, be sure to advocate for yourself throughout the process and to do your due diligence to analyze and weigh the benefits and consequences of each option.

Also Read: Things To Know Before You Negotiate For Debt Settlement Citing Health Reasons

#1: Paying Your Monthly Balance

This approach is simple: It involves paying down your outstanding balances on a monthly basis. The goal is to consistently make the minimum payments required to prevent interest from continuing to accrue. But in order to succeed, you need to try to exceed the minimum amount by at least a small percentage, or it will take a long time to pay the debt in full.

Pros: This option helps you avoid late fees and higher interest rates. You can also pay down your debt without any impact on your credit score.

Cons: You may not have the funds to consistently make these payments, and it can take a long time to pay down the total debt if you aren’t seriously exceeding the minimum payment amounts.

#2: Debt Settlement

This option requires the cooperation of a debt settlement agency or debt relief company. The company or organization will negotiate on your behalf to persuade the creditor to reduce your amount owed. While creditors rarely forgive the entire balance, this is nonetheless a useful way to reduce the overall debt burden. This process usually starts with a review of your financial situation – for instance, how much you can afford to pay.

Pros: This option reduces your overall amount owed.

Cons: It will impact your credit score. Also, your forgiven amount will be deemed taxable income, so you will need to be prepared to pay a lump sum to Uncle Sam once your creditor officially forgives a portion of your debt.

#3: Debt Consolidation Loans

This is a popular option that entails rolling all of your debts into a single amount owed, so you only have to make a single monthly payment rather than juggling and managing multiple accounts. One common type of debt consolidation loan is a home equity loan.

Pros: There are several pros to this option. First, it simplifies your life by only requiring one payment, making it less stressful to organize and track your amounts owed. Second, you can remove your high-interest debts by maintaining just one single payment each month.

Cons: As with the other options, taking out a debt consolidation loan will impact your credit score. Also, if you opt for a home equity loan, your home will be on the line if you default on your payments. If you choose this option, it’s critical to carefully follow your budget and make your payments in a timely manner so your home – or other property – isn’t impacted.

#4: Debt Management

Also called credit counseling, this option requires enrolling in a debt management program or engaging a debt relief company to counsel you on your debts. Your financial partner will also likely consolidate your debt and pay your creditors on your behalf.

Pros: These groups can help you lower your interest rates and monthly payments and can even negotiate with your creditors to lower your balance. Also, working with an experienced debt management professional can help you get your spending and saving habits back on track so you can avoid falling into the same debt trap again.

Cons: As with many of the other options, this course will negatively impact your credit report and history.

#5: Bankruptcy

Often deemed a last resort, bankruptcy is an option many debtors seek when their debts simply become too overwhelming. When you file for bankruptcy, you declare to a court that you are unable to pay your debts and that you seek to have your debts discharged in a formal legal proceeding.

Pros: Bankruptcy can give many debtors the fresh start they desire by discharging – or wiping out – their debts.

Cons: In many cases, pursuing bankruptcy will subject your assets to levy by your creditors, who will line up to take what they are owed to satisfy their outstanding debts. It will also drastically impact your credit report. Not to mention, it is not a guaranteed success. In some cases, a judge may not discharge your debts, but rather, will order that you enter a financial plan through a Chapter 13 filing. This means that you will need to pay portions of your debt to creditors on a planned, pre-set schedule that both your creditors and the court must approve.

Positioning Yourself for Success

While it’s critical to understand your options and to be your own advocate in your debt relief journey, it’s also advisable to find a partner to guide you through the process.

Author Bio:

Tim has a finance degree from CSUF with 15 years of combined experience in CountryWide Debt Relief, a debt consolidation company. He has a great passion for writing, and he provides useful advice through his article on debt relief, debt consolidation loans and credit card consolidation.