You never intended for things to get so out of hand. Yet here you are, with unmanageable credit card debt. Did you know that, if handled properly, debt relief can rid you of your albatross?
Here’s what you should know about credit card debt relief.
What is debt relief?
Debt relief could mean erasing the debt through bankruptcy, getting your interest rate reduced, getting your payments lowered, or negotiating with your creditors to pay less than the full amount owed.
When should you seek it?
If you could potentially clear your unsecured debt in five years or so, you might want to consider some combo of debt consolidation, tighter budgeting, and trying to get creditors to cut you some slack. Otherwise, you may want to pursue debt settlement, debt management, or bankruptcy if you’ve slashed spending to the bone and still can’t see your way out in under five years, OR if your debt equals at least one-half of your gross income.
Relief through debt settlement.
With this strategy, you’ll hire a company to negotiate with your creditors to get them to allow you to pay less than what you owe to “settle” the debt. You’ll usually be asked by the company to stop making payments and instead put funds into a savings-type account that you control.
As you’re saving, the company is working with each creditor on your behalf. Although your creditors are not obliged to accept a settlement offer, they are usually motivated to take something rather than nothing. This strategy isn’t for everyone since your credit will be hurt, but you’ll have a clean chance to rebuild. Just make sure you use a reputable, experienced company. See credit card debt relief reviews.
Relief through bankruptcy.
If you aren’t going to stick to a debt settlement or debt management plan, there’s little point in going that route. Still, you should speak with a bankruptcy attorney before committing to a debt relief strategy. The first consultation is typically free.
- Chapter 7. This is the most common kind of bankruptcy, and it can wipe out the most unsecured debt in about three to four months. However, the filing will be on your credit report for up to a decade even as you work to improve your credit history. If your credit is already poor, bankruptcy is a way to rehabilitate your credit faster than continuing to try to repay. Chapter 7 may not be the best tack if you must relinquish property you wish to keep. Check your state for rules.
- Chapter 13. Under this option, which stays on your credit report for seven years, the court will craft a three- to five-year plan based on your earnings and obligations. You do get to keep your assets – if you keep current with payments.
Relief through debt management.
This kind of plan lets you pay off your unsecured debts – usually credit cards – at a lower interest rate or with waived fees. A single payment is made each month to a credit counseling agency, which pays your creditors.
Note that under this kind of plan, you must close active credit card accounts – which can hurt your credit scores — and you won’t be able to apply for new plastic until the plan is completed. If you don’t make your payments, you’ll be completing your plan earlier than anticipated. In other words, you’ll get kicked off.
In the end, what you should know about credit card debt relief is that you likely have more options than you thought. Take a clear-eyed look at your financial situation and choose the best solution for you.