5 Ways to Get out of Debt
Getting out of debt can improve an individual’s quality of life and open new doors. There are many unexpected events that can negatively affect a person’s personal finances and cause serious financial stress. Debt management is possible, however, and is available in many different forms. Some of the most common methods to get out of debt include credit counseling, debt consolidation program, cash-out refinance, debt settlement, credit card debt and bankruptcy.
What is Credit Counseling?
Credit counseling is one of the best ways to help a person better understand the depth of their financial situation, and the options they have to improve it. A professional counselor acts as a liaison between the individual and their creditors to try to negotiate lower interest rates. They can also create a plan for the individual to organize and better manage their debt-related expenses.
This debt management plan allows the individual to make lower payments through their counselor, who then pays the creditors.
While credit counselors can be very beneficial, they do not have the ability to directly reduce the amount of debt an individual owes.
Lowering interest rates is, of course, helpful, but the principal amount cannot be negotiated or changed.
Speaking with a credit counselor can also give you a negative reputation among lenders.
They may see you as a credit risk if you are having a counselor negotiate your account details. Also, credit counselors are not free, so the individual should be careful to know how much they are paying their credit counselor to avoid accumulating even more debt from this expense. Monthly payment amounts are often increased in debt management plans, which could leave the individual right back where they started.
What is Debt Consolidation?
Debt consolidation is a very popular method that combines all outstanding debt across multiple creditors into one, single debt amount. A person can apply for a personal or debt consolidation loan so that they are only making payments to one creditor instead of multiple, often at a lower interest rate.
All monthly payments are combined into one monthly payment of a determined amount.
Something to consider when using debt consolidation is that loans can at times require collateral. Collateral secures the loan through an asset owned by the applicant, such as their car or house. If the individual fails to pay the loan, these assets could be repossessed by the lender.
Those who do not have collateral could expect to see higher interest rates when applying for a personal loan. Also, being approved for a loan will not reduce the principal amount of debt owed.
Being approved for a personal or debt consolidation loan requires good credit, which can be difficult for those who are already under financial stress.
Fortunately, taking out one of these loans does not impact the credit of the applicant unless they are unable to pay the loan back. The terms of the loan are often customized to a certain degree to help the individual choose the best plan for their situation.
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Cash-out refinance lets homeowners work with a mortgage lender to help pay off their debt. Those who own a home can refinance their mortgage, add up the amount of debt they owe, then apply that amount to their current mortgage balance. They can then take that excess amount out in cash and use it to pay off the creditors, thus only having to repay the remaining balance to their mortgage company. This lowers the interest rate and creates one payment that is made each month.
Cash-out refinancing is only appropriate for homeowners with good standing credit, a steady income, and equity in their home.
This is crucial to consider because many will need to choose this option before their debt gets unmanageable and hurts their credit, decreasing the chances of being able to use a cash-out refinance in the future. There are also other costs to consider when refinancing a home, including closing costs and the impact of increased mortgage debt.
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How Does Debt Settlement work?
Debt settlement, also known as debt resolution, is when a company that offers debt settlement tries to convince creditors to allow the debtor to pay a lower total amount than what is owed.
The individual would then pay the settlement company that lower amount. Much like a credit counselor negotiates to lower interest rates, debt settlement negotiates to reduce the principal amount owed. If done correctly, this can be extremely beneficial to the individual. They can save a significant amount of money if approved.
Debt settlement, unfortunately, can put a damper on a person’s credit. However, credit can be rebuilt by consistently paying the new smaller monthly payments.
This may be a good option for those who have already become financially overwhelmed and are facing repercussions for not being able to make their current monthly payments.
How To Avoid Bankruptcy
Bankruptcy should be the last resort for those who are entirely unable to pay back their debt. This is a legal process that is often extremely damaging to an individual’s credit and financial status. There are two different kinds of bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 is the most commonly used method to remove all debt giving you a fresh start.
This can have devastating effects on the person’s credit, and they may even lose assets to cover the debt owed. Chapter 13 does not always completely clear a person of debt but can lower the principal amount, so the individual owes much less. The individual then owes payments to the court who passes the money to the creditors. This can also severely hurt a person’s credit.
There are ways a person can take control of their personal finances on their own. By organizing finances and using free tools online, those who are struggling to manage their debt can create a plan to help get back on track.