Debt Consolidation Alternatives
There’s more than one way out of debt. Before you make a decision on which path you’ll follow, you should know which one is best for you. You might be able to consolidate your debt, but just because you can, doesn’t mean you always should. Take a look at these consolidation alternatives.
Who is it best for? Those with large amount of debt, struggling with hardship and/or thinking about bankruptcy
Also called debt reduction or debt negotiation, debt settlement is a form of debt management that many confuse with consolidation. In debt consolidation, your debts are consolidated and your old creditors are replaced with one creditor. In debt settlement, you have one monthly program payment, but your creditors remain. This is how it works: you contact a debt settlement firm and create a custom debt relief plan. The debt settlement firm then contacts your creditors to negotiate lower overall amounts. While they’re busy negotiating you save money. Instead of paying creditors, you pay into a dedicated program account that you control. As you save money, the debt settlement firm will come to you with negotiated balances. After you approve the new negotiated balances, you pay them off with the money you saved up. The benefit of debt settlement is the speed and possibility of reduced debt amounts. While every debt situation is unique, many debt settlement customers could pay off their debt faster and may end up paying less.
Who is it for? Those that can pay their bills, but just need to pay less for a month or two. Not recommended for long term debt relief.
On the opposite end of the spectrum from debt settlement is the minimum payment strategy. Debt settlement could help you get out of debt quicker than simply making minimum monthly payments. Making minimum payments will only keep you in debt longer. Minimum payments can be enticing, especially when some creditors will accept payments as low as $5 to $15 per month. Unfortunately those low payments barely cover interest. Unless you have an interest rate of zero, making minimum payments will increase your debt amount over time. If you made $15 per month payments on a $500 debt, it would take you more than 33 months (almost three years) to pay back, and that’s without interest! That’s why this strategy only works for those that can confidently pay off their debt. If you’re struggling to make the minimum payments, call a debt specialist and ask about other debt management solutions.
Who is it for? Those that have tried other debt management solutions but could not maintain monthly payments. This is usually a tool of last resort.
Bankruptcy has a number of negatives tied to it, including social stigmas and a damaging credit score. It usually requires a full public disclosure of all your assets and liabilities and it remains on your credit report up to 10 years. When bankruptcy laws were reformed in 2005, Chapter 7 bankruptcy—the kind that can eliminate or discharge your debts—became harder to qualify for. That lead to more people filing for Chapter 13 bankruptcy, which does not eliminate all of your debts, but puts you into a court approved repayment plan. On top of everything you still have to pay filing and legal fees, which can be significant depending on your situation. Bankruptcy is usually only recommended if you’ve already tried other methods of debt management. Note, you should always consult a licensed attorney in your state for further information and guidance on Bankruptcy matters.
Who is it for? Designed for those with significant debt burdens who want to lower payments and need help changing their budget and/or spending habits.
Crediting counseling is a service for those that want holistic help managing their debt and finances. Credit counseling services vary, some offer one-on-one counseling sessions over several weeks, others simply point customers in the right direction. Credit counseling services often bring in other services on this list. A counselor could help you find a consolidation service, or even offer one of their own. They might assist you in filling out bankruptcy paperwork or even help you plan a new budget so you can afford to make your monthly debt settlement payments. The services you get depend on what company you go with. Make sure you choose a reputable company, and know what you’re looking for before you start talking to a counselor.