Debt Relief Options

Minimum Payments

The minimum payment trap set forth by Credit Card Companies is one that many consumers fall into, only paying their minimum payments each month. This is by far, the most profitable for creditors, because by paying only the minimum payment each month, consumers essentially find themselves in a life time payment plan.

The only benefits If you are able to make your minimum payment on time each and every month is that you are less likely to be hit with huge late fees, raises in interest and stressful calls from the collectors. Your timely payments also will show positively on your credit.

If you have the means to pay more than your minimums each month, you certainly should do so without considering any other options. Consumers that find themselves in the position of only being able to pay their minimum payments will likely be in debt forever. The reason is, if a payment is even a day late, credit card companies will hit you with late fees, and even worse, raise your interest rate through the roof. Once that happens, the minimum payments normally go up significantly, and it puts you at risk  where you can't afford your payments.

Also, having balances on credit cards that exceeds 50% of total credit credit limit will have a negative effect on your credit, even if you continue to pay your minimum payments each month.

The primary downside to making just minimum payments each month is simple. Cost. If you have $30,000 in credit card and other similar unsecured debt with an interest rate of 19%, it can take you over 50 years to pay off the debt with a total cost of over $100,000

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Home Equity Loans

Using a home equity loan as a debt relief option means taking out a second mortgage or line of credit secured by the equity in your home to pay off your unsecured debt.

 However, do to the economy and the dramatic downturn in home values has eliminated billions of dollars of home equity and significantly increased the lenders qualification requirements. In turn, this debt relief option is much less viable for most consumers.

There are also great risk associated with this debt relief method. Too often consumers accumulate large amounts of unsecured debt, use a home equity loan to pay off that debt and then accumulate credit card debt again. This cycle can usually be contributed to poor budgeting, lack of discipline in making purchases on credit or simply due to poor debt-to-income.

The risk with home equity loans is if you do fall into that cycle, or any other financial hardship and are unable to make payments on the loan, your home can be foreclosed by the lender because loans is now secured by your home.

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Credit Counseling (debt consolidation)

Credit Counseling is one of the best known and popular option for people seeking debt relief.

Once enrolled, the consumer is required to make a single consolidated payment directly to the counseling agency, and they distribute that payment to each of your enrolled creditors every month. The average length of such a program is typically 4 to 7 years.

The primary goal of credit counseling is to get the interest rates reduced, which enables consumers to get out of debt (often times) significantly quicker and for less money than just making minimum payments.

Credit counseling can beneficial if you can afford your monthly payments and would prefer to make a single payment each month, rather than a payment to each of your creditors.

As with any program there are many downsides to consider.
All your credit accounts, when enrolled in a credit counseling program, must be closed. And if you unexpectedly need credit during that time, it is very likely you will not be able to get it.

While your credit score itself will usually not be negatively effected by enrolling in a credit counseling program, your ability to establish new credit or qualify for a home loan, car loan, or any other credit will be virtually impossible.

Although interest rates are usually (but not always) lowered in credit counseling programs, the monthly payments typically will be slightly less, stay the same or sometimes more. For consumers that are struggling or unable to make their minimum monthly payments, this option will not provide cash flow relief.

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Debt Settlement

Debt Settlement (also referred to as Debt Negotiation is legal and relatively new approach to debt relief. This program is ideal for consumers that are truly struggling, or can no longer afford to make their minimum payments.

Typically, a reputable debt settlement company can help people that are struggling with unsecured debt, by representing them in negotiations with creditors to secure settlements of anywhere between 40 to 80% of the amount of debt owed. Of the debt relief options, debt settlement is the least expensive and shortest in length, with most debt settlement programs averaging between 12 to 36 months in length.

While debt settlement is an option intended for getting consumers out of debt, another major benefit for consumers that graduate from these programs is often more enticing to lenders than people enrolled in credit counseling or that have bankruptcies on their record.

The downside to consumers that drop out of a debt settlement program is the risk of being in worse financial shape than when they enrolled in the program. The same scenario also applies to Credit Counseling.

As with credit counseling, there are a lot of debt settlement companies that can actually hurt you, rather than help you. It's important to do your research and make sure you select a reputable company to negotiate on your behalf.

While enrolled in a debt settlement program, it's typical for credit scores to decline.

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Bankruptcy

There are two different types of bankruptcy for consumers; chapter 7 and chapter 13. Recently a new bankruptcy law passed that requires consumers to take a state means test to determine which bankruptcy you qualify for. If it's determined your income is above the state means, you would most likely qualify for a chapter 13 bankruptcy. In a chapter 13 bankruptcy, you would be set up with a trustee of the court, and required to pay back a major portion of your debt.

As highly recommended by financial experts, most consumers should consider Bankruptcy as an absolute last resort for debt relief.

Among the benefits of bankruptcy include the chance that you can save your home from foreclosure (if it's at risk). Also, for consumers that have been receiving collection calls as a result of not making payments, bankruptcy can put a stop to the calls.  Risks associated with this debt relief option are limited.

The disadvantage of personal bankruptcy is that a record of the bankruptcy stays on your credit record for up to 10 years and is reflected on your public record for life. While bankruptcy on your credit record it will be more difficult to get loans from lenders then with any other debt relief option.
Additionally, even after the bankruptcy is off of your credit record, the fact that it's on your personal record means for the rest of your life, any time you apply for a new job, or for credit and asked if you have ever filed for bankruptcy, you are required by law, to say yes. Doing so can have a negative effect on your chance for the job and approval for loan applications.