Educating yourself and exploring your options is always a smart first step. If you’ve searched for debt solutions online, you’ve probably been bombarded with advertising. And, you’ve probably seen a lot of proposed solutions that look too good to be true.
This overview will help you sort out some of the most common options for getting out of debt, and the general pros and cons of each.
1. Negotiating with Creditors: If you’ve fallen behind and are having trouble catching up, but have regular income to make payments moving forward, it may make sense to talk to your creditors before considering other action. Some creditors will allow you to skip a payment or two, moving those payments to the back end of your loan. Or, your credit card company may eliminate some late fees or even freeze them for a time to help you get caught up. Negotiating usually won’t solve the problem for those who have taken on too much debt, but may help weather a short-term problem or get back on track after a brief interruption in income or unexpected expense.
2. Debt Consolidation Loans: If you have enough income to pay your debt, but are struggling to keep up with a bunch of different minimum payments each month and paying high interest rates, a debt consolidation loan may be helpful. You may be able to take out a loan that allows you to make one monthly payment instead of several and pay a lower interest rate. But, there are two pitfalls often associated with debt consolidation loans. The first, and most serious, is that if you’re already having financial difficulty and your credit isn’t strong, you may have to provide security for the loan. For most people, that means a lien on your home, which can be risky. If it turns out you still can’t keep up payments, you could find yourself facing foreclosure. The other possible problem is that while a debt consolidation loan may offer a lower interest rate, they often stretch out payments over a longer period. That can mean paying more total interest across the life of the loan, even though the interest rate is lower.
3. Debt Settlement: Debt settlement companies often put out enticing advertisements, suggesting that you can pay just a fraction of your outstanding debt. While that’s true in a few cases, there are many possible downsides to debt settlement companies. First, debt settlement companies generally charge large fees upfront and don’t start negotiating with creditors until you’ve banked the funds to pay their fees first then they attempt to settle a debt. That can mean months or years of negative credit reporting while you build up those funds, with no guarantee that your creditors will agree. And, there’s nothing to stop them from taking collection action, including filing a lawsuit against you, while you’re sending your money to the debt settlement company instead of to your creditors. Some large national creditors have firm policies against negotiating with debt settlement companies, but the companies may not tell you that when you sign on.
4. Debt Management Plans: Debt management plans work much like debt consolidation loans, but there’s no loan involved. Instead, a non-profit credit counseling agency negotiates with your creditors for lower monthly payments and lower interest rates, and you make one monthly payment to the agency. Debt management plans are generally less risky than secured debt consolidation loans and may make debt easier to manage. But, their usefulness depends in large part on the type of debt you’re carrying and who your creditors are. You generally can’t manage secured debt like car loans through a debt management plan, and some creditors won’t work with credit counseling agencies. So, you could shift some debt into a debt management plan and still end up making regular payments on other debts. Creditors who do participate in the plan will typically close your account, which often leads to an initial drop in credit scores.
There’s no one-size-fits-all solution for overwhelming debt. The right answer depends on the amount of outstanding debt you’re carrying, the type of debt, your income, your assets, and your short-term and long-term goals--among other factors. The more information you have in advance, the more prepared you’ll be to make the best decision for you and your family. One useful tool in the information-gathering process is to schedule a consultation with a Tucson bankruptcy attorney to learn more about Chapter 7 and Chapter 13 bankruptcy and how each might play out in your circumstances.
The Judge Law Firm helps people in the Tucson area who are overwhelmed by debt. To learn more about how we may be able to help, schedule a consultation right now. Just call 520-815-1000 or fill out the contact form at the bottom of this page.