There are many different ways to eliminate unsecured debts and it is important to know how to differentiate between your options to make certain the one you have chosen best fits your needs and financial goals long term. We will outline the various ways available in the debt management market.
THE LONE LOAN: A consolidation LOAN- not a plan or program – is a loan obtained to pay off all unsecured debts by consolidating them all into one loan for one rate and monthly payment. This can be effective for some people but the term –robbing Peter to pay Paul- comes to mind as all you are really doing is taking out another unsecured debt to merge a multitude of debts. Something to keep in mind as well, the rate of the loan. You will want to know and understand your default terms as most lenders take a delinquent or missed payment as an opportunity to increase your rates. Now you are back to square one.
SETTLE FOR LESS: Debt Settlements, ahhhh –debt relief…for the right person based on your financial situation and long term credit goals. A debt settlement program is another way to eliminate debt that utilizes similar terminology like, just one monthly payment, debt management, debt consolidation, and debt relief. A settlement program pays back the debt at a reduced amount from the original amount owed, usually between 30%-60% less. While this may sound appealing to everyone it is only beneficial to a certain few. In order to settle a debt it must first –charge off- A charged off debt reflects poorly on your credit for 7 years as a bad debt, paid in full or not. An account does not charge off until it has been delinquent for 5-6 months of non-payment. Collection calls are usually consistent and some creditors will still take legal pursuit to resolve the debt. When the debt is settled upon the difference is then considered taxable income the following year and the debtor is issued a 1099 form to claim the amount as taxable income.
If you have had a financial analysis on your monthly budget and are extremely over-extended a settlement plan may help you avoid filing bankrupt. If your primary concern is eliminating your debt and you have no major purchases to consider for the next 7 years then your credit score is not your primary concern and this could be the best available option for you.
CONSOLIDATE: Debt consolidation, credit counseling, can be beneficial for someone looking to stop using their cards and improve their credit over time. Like settlements and consolidation loans, the same terminology is used to describe the services. One monthly payment, debt elimination, debt management, consolidate your credit, etc. A debt consolidation plan allows you to pay back the total debt amount with monthly payments at reduced rates with the stopping of other fees. Most consolidation companies have agreements with creditors and established guidelines for minimum monthly payment requirements, which can be less the minimums you are currently paying. While making minimum monthlies in a consolidation plan the consumer is able to watch more of their monthly payment decrease the outstanding balance as the creditor fees stop once enrolled and the finance charges are reduced to fixed rates. Like the other plans it also allows the convenience of one monthly payment. A credit score can improve over time as 35 percent of your score is determined by timely consecutive payments. Another 30 percent contributes to the outstanding balance due between all accounts. With reduced interest the balances decrease much faster than if attempting on your own.
The accounts consolidated must be closed upon entering the plan but most plans allow you to keep one account open for emergencies. A consolidation plan can help increase your credit score with timely payments and eliminate your debt faster at reduced rates.
In doing your research you will first want to assess where you currently are with your finances, where you want to go, and how you will then get there. Going through a free budget counseling session with a certified credit counselor is a good start to help assess where you are currently at and what your options are. Working with a non-profit is your best bet and will help you avoid any extra costs going through a third party. A check with the Better Business Bureau of a company is always a good idea to see what type of reputation they have from previous clients.
Call 800-905-1563 to talk to a non-profit certified credit counselor today to explore what your options may be and for a free budget counseling session. You may also visit our website freedomdm.org and complete our online inquiry form for a counselor to contact you at a time you are available.