As per a research, around 77% of the households in the US carry some sort of debt. Mortgage, car loans, personal loans, credit card debt, it’s all very common nowadays and there are millions of people who struggle when it comes to paying off their debt. Especially in the current economic situation, dealing with debt really does become a huge burden. To get rid of their debt, people often choose debt settlement. Now, yes, debt settlement does reduce your debt but it’s not always the best option for everyone.
Debt settlement comes with some serious consequences. For example, it can wreak havoc on your credit score, it can lead to tax consequences and you can even get sued by your creditor. Fortunately, there are some safer and more effective alternatives to debt settlement that can help you resolve your debt with your creditors without taking any unnecessary risks.
1-Debt Consolidation
Debt consolidation is one of the best debt relief options and it’s a great alternative to debt settlement too. It’s specifically for those who have a good to fair credit score. However, it’s a little different from debt settlement because it doesn’t reduce your debt, in fact, it’ll just help you streamline your payments. What happens in debt consolidation is that you take up a new loan to pay off your other loans. You basically consolidate your loans into a single loan with a fixed interest rate.
This won’t just help you simplify your monthly payments but it’ll also help improve your credit utilization ratio. Moreover, with the fixed interest rate, you’ll save yourself some money too. The only downside of debt consolidation is that it’s only for those with a fair credit score. Moreover, it doesn’t reduce your debt and in some cases, you’ll have to pay fees or penalties too.
2-Debt Management Plans
A Debt Management plan is the best suitable option for those with high interest credit card debt. What happens here is that you contact a nonprofit credit counseling agency and they provide you a debt management plan which means they’ll consolidate all of your unsecured debts into a single monthly payment. The agency will then negotiate with your creditors to reduce the interest rates and in return, they’ll ensure timely monthly payments on your behalf.
The best thing about a DMP is that it doesn’t negatively affect your credit score. It’ll help reduce your fee and interest rate and you’ll only have to deal with a single monthly payment. On the other hand, it does come with a few downsides, including;
- It can take 3 to 5 years to complete
- You’ll have to pay a monthly fee of $25 to $50
- You’ll have to close all of your credit card accounts
3-Credit Counseling
If you aren’t sure where to start from and how to manage your debt then credit counseling is the best way out. Using professional help from a certified credit counselor can work wonders for you when you are stuck with debt and a financial crisis all at the same time. You can search for both free or low-cost credit counseling services. The professionals will help assess your financial situation, they’ll help you create a budget and guide you through different debt relief options.
The advantage of using a credit counseling service is that you’ll get professional and unbiased financial advice. These service providers often don’t charge anything and even if they do, it’s quite minimal. The only issue with this step is that it’s not a quick fix to your debt problems and it won’t help you reduce or eliminate your debt.
4-Balance Transfer Credit Cards
If you are dealing with high interest debt then using a balance transfer credit card is another great alternative to debt settlement. What happens is that you move your existing debt to a new card that has an introductory period where they don’t charge you any interest. The period lasts between 6 months to 21 months and you have to manage your debt during this period if you want to save your money on interest.
In a nutshell, you have to take advantage of the promotional period and try to pay down your debt faster without worrying about any interest. The disadvantage of using a balance transfer credit card is that some cards charge between 3% to 5% of the total amount transferred. Also, after the promotional period ends, you’ll have to deal with a higher APR. Only those with a good to excellent credit score can qualify for such cards so if you do fall in that category then yes, it’s a great option for you to become debt-free faster.
5- Bankruptcy
Bankruptcy is usually the last resort for people and it’s not an alternative to debt settlement. In fact, it’s a legal process that helps you sort or restructure your debt obligations when you aren’t able to pay. There are two types; Chapter 7 bankruptcy and Chapter 13 bankruptcy. In Chapter 7, the court will discharge all of your unsecured debts once you pass the means test. On the other hand, Chapter 13 is when the court creates a repayment plan for you that lasts for 3 to 5 years.
Bankruptcy can help you get legal protection when you aren’t able to pay off your debt and it also gives you a fresh start. However, it comes with some serious consequences like it’ll severely damage your credit score and it’ll stay on your credit report for 7 years. Also, you can possibly lose your assets and your bankruptcy will be a public record. Again, it’s not an alternative and you shouldn’t consider it until unless there’s no way out left for you.
When Debt Settlement Is The Best Option
Debt settlement should also be used as a last resort but there are some situations when it’s the better option out of all the other alternatives. Here are some scenarios when you should prefer debt settlement;
You Don’t Qualify For Debt Consolidation
Debt consolidation loans are usually provided to those with good to fair credit scores. If you have a poor score, debt consolidation won’t help you save any money. This is when debt settlement can come in handy. Yes, it will negatively impact your credit score but that’s something that you can work on later. In the meantime to get rid of your debt faster, a settlement offer will be great.
You Have A Lump Sum Available
Debt settlement is the easier way out mainly because it’ll reduce the amount you owe. For this, you of course need a lump sum to settle with your creditor and if you have that then debt settlement will become a lot easier for you. Offer a realistic lump sum to your creditor to make sure that the deal goes through.
You Are Facing Serious Financial Hardship
Financial hardships can make it really difficult for people to pay off their debts. If you are going through a divorce, a serious illness or loss of job etc then these reasons do qualify for debt settlement. You just have to talk to your creditor or hire a third party to help you settle your debt. With a delinquent account, a valid financial hardship and a reasonable lump sum, you can easily convince your creditor for a settlement.
Overall Verdict
No matter which debt relief option you choose, it’ll always have downsides to it. The truth is that dealing with debt isn’t easy and you have to go through a bump road first in order to achieve complete financial freedom. It’s important to work with a financial counselor to ensure that you are taking the right path forward. A professional counselor will help assess your financial situation, help you make a budget and help you find a way out to become debt free.
FAQs
Q1. Is Debt Settlement Better Than Bankruptcy?
Debt settlement is the better option when you are trying to avoid legal proceedings and when you do have the ability to pay the reduced amount to your creditor. On the other hand, bankruptcy is the last resort when you don’t have anything to offer to your creditor and when you are looking for a fresh start.
Q2. Will A Debt Management Plan Hurt My Credit Score?
When you close your credit card accounts, it’ll hurt your credit score a bit initially but that’s something you can work on later. In fact, with a DMP, when you start making your payments on time, it can help you improve your credit score.
Q3. Can I Qualify For A Debt Consolidation Loan With A Poor Credit?
Yes you can qualify for debt consolidation loans with a poor credit but you’ll have to pay higher interests. In fact, some lenders even require co-signers when lending money to someone with a poor or below average credit score.