Many Americans face steep challenges paying off their debt. Fortunately, there are many financial relief and repair options available to help do this. These include debt settlement, credit repair, loan consolidation, and bankruptcy.
This financial relief and repair option is also known as debt relief or debt adjustment. Here’s how it works:
- A company offers to contact your creditors and renegotiate the amount of debt you owe, with the promise of paying the reduced debt in one lump sum. It does this will all companies willing to negotiate.
- You agree to allow the company to repay the lump sums owed to your creditors, and then you repay the company with monthly payments.
The goal of debt settlement is to reduce your total debt owed and to get a lower, more manageable monthly payment. Additionally, you no longer have to deal with multiple creditors demanding payment.
There are, however, some risks associated with the process. Some creditors may not agree to a reduced lump sum payment. You also have to be wary of late fees or high interest rates charged by the company negotiating your debt settlement.
This refers to fixing poor credit. The term has different meanings, with two discussed here.
Sometimes, credit can be improved simply by correcting mistaken information on your credit reports.
To do this, a company offers to review your credit reports and dispute any incomplete or erroneous information listed by credit bureaus. Once the information is corrected, your credit score may improve.
The drawback of credit repair is that it costs you money. Typically, the company negotiating on your behalf charges an initial setup fee and then monthly fees. You need to take a hard look at these fees and determine whether you believe the promised credit repair is worth the cost.
Individual Credit Repair
Alternatively, the individual can begin work to repair credit themselves. This involves two steps.
First, you can investigate and work with the credit bureaus yourself to eliminate any missing or erroneous information on your credit report.
Second, you begin the hard work of slowly repairing your credit by making all owed payments timely and responsibly handling new credit inquiries.
Many of us have several different types of debt – credit cards, medical bills, retail accounts, and student debt. Managing to pay them all on time can be difficult.
One financial relief and repair option is loan consolidation. Under this process, you apply for a loan from your bank. You use the proceeds of this loan to pay off all other debts and then make one monthly payment on the bank loan.
Although you still owe the same amount of debt, you may have a reduced percentage rate and lower monthly payment.
Let’s face it – a lot of us have tried debt settlement, credit repair, and loan consolidation. Nevertheless, despite our best efforts, monthly payments continue to be unmanageable, and our credit continues to suffer.
In those cases, bankruptcy may be an option. Bankruptcy has the benefit of eliminating debt and giving the filer a new financial start.
There are two types of bankruptcy for the individual – Chapter 7 and Chapter 13.
- Chapter 7 is the most common kind of bankruptcy. Through the process, most debt is eliminated, and the filer gets a fresh start.
- Chapter 13 is different. Instead of debt elimination, the filer pays off some or all of the debt over a period of three to five years.
The filer does not get to choose which type of bankruptcy they prefer. Instead, it depends on your income. Basically, if your monthly income is below the median income for households of your size in your state, you qualify for Chapter 7. You may qualify if you make more, but it is a complicated process, and we recommend consulting a bankruptcy attorney for more information.
While bankruptcy is advantageous, it does have drawbacks. These include:
- Lower credit score. If you file Chapter 7, your credit score may be reduced by up to 200 points. Likely, it will less than that for Chapter 13. Also, the bankruptcy is included on your credit report for ten years (Chapter 7) or seven years (Chapter 13).
- Difficult obtaining credit. It will not be easy getting credit in the immediate aftermath of bankruptcy. You may have to seek alternatives to traditional credit through secure credit cards, co-signing, or finding someone willing to let you be an authorized user on their credit account.
- Waiting period for mortgages. For most mortgages, there will be a waiting period of one to four years. Conventional Fannie Mae and Freddie Mac loans, for example, generally have a waiting period of four years.
Despite these disadvantages, chapter 7 and 13 bankruptcy can be one of the toughest financial relief and repair options, but they can give you a fresh financial start. For many Americans, it’s the only solution left.
Get Help Today
If you’re in debt and looking for financial relief and repair options, there are many avenues for dealing with the debt. If you have any questions about these options, fill out our free evaluation, and a local bankruptcy attorney will be in contact to help you move forward with your financial future.