Finance isn’t exactly the most straightforward subject, and more often than not, colloquial terms don’t always have the same meaning as their strict legal definitions. Debt relief is a similar case, it’s often misunderstood as people often have different ideas about what it entails or what it actually is. To understand debt relief better, it helps to know what these choices are.
In this article, we’ll quickly explain the five major debt relief options. The actual ins and outs of each can get pretty complex, so we’ll just give some of the important things most of us to know. To understand each option in detail, be sure to.
For most cases of runaway consumer debt, debt management is perhaps the most appealing option as it can cost less than the other methods and help you combine some types of debt into one. This means you’ll have fewer headaches tracking down individual bills since many of them will be combined into one more manageable debt. Going down this route often requires you to adhere to a payment plan that can take many months to years to complete.
It does come with a few drawbacks. You will not be able to combine some debts, such as student loans, medical bills, and taxes. You will also be unable to use credit cards during the course of the program, which can be an incredibly difficult habit for some people to break. Lastly, payment plans tend to be very strict and there can be consequences for missing one payment.
That said, debt management is quite an attractive alternative with a huge payoff helping you regain your financial independence and hopefully some great habits along the way.
This type of debt relief is good for those who are actually earning a decent income but have suddenly piled up a huge debt due to some unforeseen circumstance. It won’t be a good option for those struggling to make ends meet or for those with an excessive amount of debt.
Debt consolidation is simply combining a number of different debts into one. In order to qualify for a debt consolidation program, your debt should not exceed 50% of your income and your credit rating should still be good for a 0% credit card/low-Interest consolidation loan. A spending plan to prevent future occurrences might also be required.
Debt reduction is exactly like it sounds – taking steps to reduce your debts. This is typically a more realistic option for those who may find it next to impossible to pay their debts in full. It involves taking a look at your income and overall financial picture, then calling your creditors to negotiate your debts. Typically you’ll want to look at bills that are the most problematic. A plan can then be created to figure out how best to pay off your creditors, which will hopefully set you on the path towards a debt-free life.
Sometimes debt can balloon to a point that creditors could not realistically expect any payment. A debtor could attempt to negotiate with their creditors to see if a settlement may be reached. Typically this involves the debtor being made to pay a single lump sum in exchange for debt forgiveness. This sum is typically smaller than what would be required if they were to keep paying minimum payments every month.
Debts and debt collection can be an ugly but necessary business, and these settlements are often welcomed as a win-win for all involved. The creditor gets something back and the debtor is free to live the rest of their life free of that debt. It also prevents the next scenario from happening.
Bankruptcy in simple terms is the when you, or less often your creditors, declare that you are unable to pay off your debts. This is done through a court order that could be filed by either party.
While often a cause of shame and trauma to those who have to declare it, bankruptcy is the result of unexpected circumstances. Medical bills, for example, are a leading cause of bankruptcy, as is the loss of a job due to changes in the market landscape.
Bankruptcy is essentially a protective measure for a debtor that ensures they can have a fresh start, rather than being forever trapped in an endless cycle of debt. Bankruptcy can take different forms, including reorganization, liquidation, and debt adjustment among others.