Here’s a familiar situation for many Americans who owe money: The concept of debt relief sounds great, but you’re not sure exactly which strategy to pursue.
Debt settlement, consolidation, management, do-it-yourself repayment and bankruptcy all have their respective upsides — and downsides worth exploring. Choosing the best-fitting debt strategy based on your specific financial situation will set you up for success.
Here are some questions to ask to help you narrow the search when you’re wondering what your best debt relief options are.
Debt Relief Question #1: What Is Your Credit Score?
Your credit score is a good starting point for determining which debt relief approaches are on or off the table.
Debt consolidation, such as taking out a special loan to pay off other debts or transferring credit card balances to a new card, typically requires a credit score around 670 or higher on the FICO scale. Since consolidation aims to save money by lowering interest rates and lenders assess risk using credit scores, stronger credit makes you a better candidate here. While it is possible to pursue consolidation with poor credit, it tends to be costlier, more difficult to get approved and harder to be successfully completed.
Debt settlement programs and bankruptcy, on the other hand, are options more geared toward borrowers who have been struggling to keep up with payments and may have already seen their credit scores drop.
If you’re unsure where you stand, meeting with a credit counselor is a good — and often free — way to get advice. While credit counseling is a requirement preceding bankruptcy, it can be a helpful service for a wide range of people struggling with debt just the same. A credit counselor can offer more information about debt management and let you know if you’re eligible. These professionals are knowledgeable about many other solutions as well.
Debt Relief Question #2: How Much Debt Do You Have?
Another way to look at debt relief is by the amount. Do-it-yourself debt repayment is realistic if you can repay your debts in five years by prioritizing them, according to NerdWallet. This may entail paying them off in order of balance size (smallest to biggest) or in order of interest rate (highest to lowest).
Debt settlement, bankruptcy and debt management are more designed for borrowers who have trouble repaying debts on their own within half a decade. NerdWallet offers up this rule of thumb: You have unsecured debts equaling or exceeding half of your gross income. Indeed, many of the top debt relief programs in the U.S.A. have minimum debt thresholds borrowers must surpass to qualify — like $5,000 or $10,000.
Debt Relief Question #3: How Long Will It Take?
Debt relief in all its various forms can easily take five years. The exact length depends on how much you owe and how much you’re able to pay each month toward eradicating debt. This is where budgeting comes into play, as increasing your payments will shorten the timeline.
Debt management programs typically take three to five years. Debt settlement programs often take two to five years. The repayment terms on a consolidation loan will vary, but three to seven years is common. The common timeframe for do-it-yourself repayment is five years. Chapter 7 “liquidation” bankruptcy can be over in about three to six months, while Chapter 13 bankruptcy will usually result in a three-to-five year partial repayment plan.
Debt Relief Question #4: How Do You Budget Your Money To Pay Debts?
Budgeting is an essential skill that everyone should master. While creating a budget seems easy, it’s not. It takes a strong will to stick to a budget, and lacking the will or discipline is one of the most common reasons why so many of us go into debt. Hence, proper and strict budgeting is crucial, so you can pay your debt and avoid dire financial consequences. When you learn the art of proper budgeting, you’ll be able to lay a sound basis as to where and how you’ll spend your hard-earned money.
You need to set an effective reminder to avoid shifting your money to a different expense. For instance, you can use an organizer, calendar, an app tracker, or a personalized spreadsheet that you can use and look at every payday to prioritize the major expenses and debts to pay—such as bills and loans.
Of course, you need to ensure that you have a regular source of income as well. If you think your current income cannot really help you pay off debts and other bills, you should learn how to make money by finding a passive income or try to explore more opportunities in the form of part-time and project-based work. With more income, you can allot more money towards the payment of your debts and pay them off faster.
At the end of the day, your best debt relief option depends on your credit score, income stream and amount of debt among other key factors.
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