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Feeling the pinch from education or medical expenses? Borrowing could be a solution, but keep in mind that loans need to be paid back. Long-term debt can negatively impact your finances, health, and lifestyle. Take charge by exploring repayment plans and understanding the risks involved to pave the way to a debt-free future.
Examine Your Financial Situation
If you feel that your debt has become overwhelming, use these markers to gauge whether you should actively pursue a path for debt relief:
- The amount of your unsecured debt (debt that is not backed up by assets), such as credit card debt or medical bills, is half or more of your gross income.
- You cannot repay unsecured debt within five years.
If one or both of these scenarios matches your situation, explore choices for debt management.
Research Options
There are many options for debt relief. Your situation will determine the best options for you. Take care, though when seeking out help. The debt relief industry includes scammers waiting to take what money you have left. Some debt relief services can cause more problems than they solve, and they could even increase your debt. Make sure to research choices carefully without succumbing to panic.
Debt Settlement Companies
Though this may seem like an easy option you should try first, financial experts suggest avoiding debt settlement. In fact, experts say bankruptcy is generally a better option. Reasons include:
- These companies usually advise you to stop paying credit card bills. You will fall further behind on payments and accumulate fees. Credit card companies may even file a lawsuit.
- Late payments lower your credit score further.
- These companies often charge costly fees.
- The Internal Revenue Service (IRS) may bill you for forgiven debt because the amounts can be counted as income.
If you decide to take this path, at least check with your state Attorney General and consumer protection agency to find out whether the debt settlement company you are considering has any complaints.
Bankruptcy
If you are not in a position to make any progress in paying your creditors, consider filing bankruptcy. This process is complicated, so you need a bankruptcy attorney to guide you through it. There are multiple types of bankruptcy, including:
- Chapter 7 - The most common type of bankruptcy, Chapter 7 can remove most unsecured debt, including credit card debt, medical bills, and some types of personal loans. However, this step takes much consideration because of potential difficulties it might produce.
- Chapter 13 - This is a repayment plan approved by a court. Most people cannot maintain the payments, but if you keep them up for the specified term, you will get debt forgiveness on any outstanding amounts.
If you are judgement proof, which means you have no property that creditors can take, you might not need to file bankruptcy.
Learn More >>> Can You File Bankruptcy on Student Loans?
Debt Management Plans
A debt management plan lets you pay credit card debt and other unsecured debts, usually without fees and with reduced interest. Administered through a credit counseling agency, this option requires you to close all credit card accounts for the duration of the repayment plan. Many people find it difficult to complete their debt management plans. You need to assess your situation to determine if this is right for you.
Self-Devised Plan
There are many actions you can take yourself, without needing to consult a debt consolidation company or a debt settlement company. These actions are the same as credit counselors would make on your behalf:
- Contact your creditors. Explain your situation, and what allowances will help you pay debt.
- If your credit score is still high, apply for a credit card with a 0% balance transfer provision to help you gain ground.
- Look for debt consolidation loans to help make repayment easier.
In addition, change your spending habits and establish a strict budget to avoid accumulating further debt. The Federal Trade Commission offers advice on paying off debt.
Beware of Debt Relief Scams
Unfortunately, scammers target people who are honestly trying to manage their debts. Two strong indicators of a debt relief scam are:
- A company asks for up-front fees - Hang up on any such communications and report the company to your state Attorney General.
- A company approaches you - Unsolicited calls or emails from someone claiming they want to help are likely fraudulent.
Seek out legitimate means of help, such as credit counseling or devise a do-it-yourself plan to try.
Learn More >>> How to Avoid Student Loan Forgiveness Scams
Take Control of Debt
Debt relief services could help you with seemingly overwhelming debt but proceed carefully. Loan forgiveness may bring tax bills. The debt relief industry is filled with scammers, and some plans may increase your debt. If you are unsure where to start, contact specialists for sound advice.