What Are Your Debt Relief Options?
A new month means new bills, and the finances of millions of Americans have long since reached critical levels as they grapple with the pandemic. If you can’t pay off your debt or are worried about losing your home or car, it’s time to consider your options: loan counseling, hardship relief, a debt management plan, or bankruptcy.
Start with credit counseling
There is no one-size-fits-all solution for debt relief as each option depends on your specific financial situation, but no matter which one you choose, start with credit counseling . Why? A qualified non-profit credit advisory agency will conduct a debt analysis free of charge. And by law, they are supposed to serve your interests and recommend a debt solution that works for you, not for them.
Update your budget
Creating a new budget is both the first step and a possible solution to taming your debt. If you are lucky, your financial problems can be solved by making a budget that accurately lists your income and expenses. This process will help you identify and eliminate unnecessary expenses that may affect the timely payment of your loan.
As part of this process, you will prioritize your debt based on the value of what you need (a secured asset such as a car or house), the value and damage done to your loan, giving you a clearer picture of your finances.
Demand relief from difficulties
To help with spending, many lenders offer COVID financial hardship plans in which they are willing – and in some cases required – to provide loan extensions, reduced interest rates, and deferred repayments. In return, these programs may require you to:
- Confirm your difficulties with the documentation.
- Freeze or close your credit card account.
- Meet with a credit counselor.
- Complete a debt management program.
- Set up automatic withdrawals from your bank account.
- Reduce your credit limit.
Sign up for a debt management plan
Your credit counselor can recommend a Debt Management Plan (DMP) that allows an individual company to work with lenders on your behalf to agree on interest rates and new monthly payments. This could involve bundling several outstanding high interest rate loans into a single lower interest rate retail loan that pays off in fixed monthly installments, with a clear start and end date.
With such an agreement, all parties agree on an affordable payment schedule that allows the debt to be paid off within three to five years. DMPs make sense for people who have a stable income but need an affordable payment plan with lower interest rates on credit card balances. The downside is that you temporarily lose access to credit, and you have to constantly pay fixed monthly payments.
Bankruptcy petition
Bankruptcy is a legal process that allows you to pay off or pay off some or all of your debts under the protection of a federal bankruptcy court. There are two filings: Chapter 7 and Chapter 13 for bankruptcy.
- In Chapter 7, your assets are liquidated to pay off debt, except for tax-exempt assets such as your 401 (k) or pension, household goods, and a low-cost car.
- Chapter 13 bankruptcy allows consumers to retain most of their assets, including their home, if they successfully comply with a court-ordered debt repayment plan.
The biggest benefit of bankruptcy is paying off most of your debt, with a few exceptions (alimony, court fees, child support, recent tax debts, and most student loans cannot be repaid through Chapter 7 bankruptcy). The downside is a significant drawback, so this is usually a last resort — you could lose your home, car, cash, and savings. Filing for bankruptcy also affects your credit history for 10 years, making it difficult to obtain loans or qualify for lower interest rates. Last but not least, filing for bankruptcy is expensive .
Before making any decision, talk to your credit counselor as he will need to analyze your overall financial situation before making any recommendations regarding your options.