Four Debt Solutions (and How to Choose the Right One for You)

If you’re struggling with debt, you’re not alone: ​​The average American is worth more than six figures (including mortgages and student loans). If trying to solve this problem using the debt avalanche or debt snowball method on your own isn’t enough, you can start researching specific debt relief programs available that may be able to help.

Amazing! However, each type of program has its pros and cons that you should carefully consider to avoid getting deeper into debt. Here’s what you need to know about the pros and cons of four different debt relief options so you can choose the one that’s right for you.

Debt settlement

Debt settlement programs can make a huge difference—they usually promise to negotiate with your creditors on your behalf to lower interest rates, structure lower payments, and help you create a payment plan that will get you out of debt over time. staying within your budget.

However, the Consumer Financial Protection Bureau warns that doing business with companies that provide these services can be risky, and there are other options to consider (more on those below).

Pros of debt repayment programs:

• Potentially can reduce the total amount of debt through negotiations with creditors.

• May allow you to pay off debt faster than other options.

• Can stop debt collection calls and lawsuits from creditors.

Disadvantages of debt repayment programs:

• Worsens your credit score, sometimes significantly

• Creditors are not required to agree to a settlement

• Debt settlement companies often charge high fees

• Repaid debts can be reported to the IRS as taxable income.

Debt consolidation

When you’re dealing with multiple sources of outstanding debt, consolidating those debts into one payment may seem like an attractive solution. Debt consolidation is the process of combining multiple credit card balances or other types of debt into one new loan (or one credit card) with a lower interest rate.

Pros of debt consolidation:

• Makes repayment easier by combining multiple debts into one loan with a lower interest rate.

• You can reduce your monthly payments

• Stops collection calls from individual creditors

Cons of Debt Consolidation:

• You may need to take out a new loan, which may include an origination fee.

• The new loan may have a longer repayment period, meaning you’ll pay more interest over time.

• Does not immediately reduce the total amount owed

Bankruptcy

Typically, people file for bankruptcy only as a last resort. Many people believe that bankruptcy is only for people who take on too much credit card debt, and while that may be true, people also file for bankruptcy after a major, unexpected financial blow —like a lawsuit or catastrophic illness.

Pros of bankruptcy (what an amazing phrase):

• Provides a legal path to eliminating or restructuring unmanageable debt.

• Can stop foreclosures, garnishments, and other debt collection actions.

• May allow you to keep certain assets, such as a home or car.

Disadvantages of bankruptcy:

• Will seriously damage your credit for 7-10 years

• Remains on your credit report for an extended period

• The bankruptcy petition is public

• Some debts, such as student loans, cannot be paid off.

Debt management programs

Not to be confused with a debt settlement program, a debt management plan groups multiple credit card debts into one payment, lowers the interest rate, and creates a repayment plan over a period of 3 to 5 years. These plans are offered by credit counseling agencies . If you’re thinking of going this route, find a nonprofit agency accredited by the National Foundation for Credit Counseling .

Pros of debt management programs:

• Can reduce interest rates and monthly payments by negotiating with lenders

• Stops debt collection calls and lawsuits from creditors.

• Allows you to pay off debt in a structured and organized way.

Cons of debt management programs:

• Credit card accounts need to be closed, which can negatively impact your credit score.

• Success depends on your ability to make the agreed upon monthly payments.

• Debt management companies typically charge a setup fee and a monthly fee.

How to choose the right solution to your debt problem

As always, if you’re unsure which option to choose, it may also be helpful to consult with a financial advisor or credit counseling agency to help you determine the best course of action. Whatever program you choose, it is important to act quickly and responsibly to regain control of your finances.

And before you think you’re on the hook for debt , it’s usually worth taking a breath and doing some digging to make sure you’re actually obligated to pay it off. Here’s an example of how you can make sure you’re responsible for all of those debts in the first place.

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