Debt Relief Solutions: Pros and Cons
When you are considering important life choices like - whether you should proceed with debt relief and credit counseling, it's smart to compare the pros and cons first. Likewise, deciding which direction to go with your debt reduction is no different. While we'd be hard-pressed to find anything inherently "bad" about eliminating overdue debt or credit card bills, we know there are both effective and ineffective ways to proceed.
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Ask yourself this question: "What's the best way for me to end my debt problems?" If you don't have all the facts at hand to make an informed decision, know that you are not alone. Many debt-ridden Americans are struggling financially and are having trouble paying debts -- often high interest unsecured debt. It's a tough place to be, but it's important to take action and not to remain on the same debt treadmill for life.
Debt Consolidation Loans
Many Americans seek debt consolidation loans to help pay for their unsecured debts, credit card debts, and a variety of personal debts. Typically, a debt consolidation loan is secured by an asset, like a home, with the objective to borrow enough (from a bank, credit union or private money sources) against the home to pay-off debt and do so while enjoying a lower interest rate. This reduces the monthly payment and can also shorten the amount of time it takes to pay off the debts. Lower interest rate, shorter payback time, one convenient, and more affordable payment.
One of the potential risks to getting a debt consolidation loan is not always so apparent. Fail to pay your loan, let it get too far behind, and you've put the house in potential jeopardy. Paying off unsecured debt with a secured debt may not be the best option for people who easily fall behind. For many debtors, particularly those who don't have the discipline to stop using their credit cards, a debt consolidation may actually make their situation go from bad to worse--should they default on the terms of their loan. For those with the discipline and perseverance required, however, debt consolidation loans can help reduce debts.
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Credit Counseling Agencies
If you are a Florida resident and looking to pay your debts in full, one option that may help reduce debts is called debt consolidation, or a debt management plan (DMP). The goal of a debt consolidation plan is to consolidate, or combine, all your credit cards and unsecured debts into one, more affordable, and easier-to-manage monthly payment made to a credit counseling agency.
Trying to secure credit card company approval for your DMP, a reliable and disciplined agency should be able to design a debt relief program for you that, if followed faithfully, can help you become debt-free at a more predictable pace. A dependable credit counseling agency will typically make proposals on your behalf to credit card companies seeking lower interest rates, and waiver of late fees and penalties -- in general, more affordable monthly payments. This can help debtors consolidate all unsecured debt, and most importantly, create one manageable payment.
The bottom line: Debt consolidation or debt management programs, if followed diligently, can help debtors get out of debt at an accelerated pace -- much faster than if you were to continue to pay only monthly minimums at higher interest rates. There is no magic or mystery to debt consolidation: 1) Stop using credit cards, 2) pay down existing debt on time at lower interest rates, and 3) debtors can reduce debt or eliminate debt at an accelerated pace.
Taking the credit counseling agency path can be a win-win for all: the consumer, credit card companies and all unsecured debt holders. Are there cons? The short answer: You should be fine if you get on a plan that puts you on a predictable path to a debt-free date. As long as one finds and works with a reliable, trusted and proven credit counseling agency, things should go as planned. However, make sure you work with a highly rated and experienced debt consolidation company. It is always wise to check with several companies before you make your final decision.
Getting off the debt treadmill takes perseverance, determination, and a debt relief company that can hold your hand while you take the steps necessary to become debt free. Also, it is important to note that these companies aren't GETTING YOU OUT OF DEBT. They are simply designing a debt management program that will meet your current financial abilities and it is UP TO YOU to remain faithful to that plan to be successful in achieving freedom from debt.
Debt Settlement Companies
For many consumers struggling with an unmanageable amount of credit card debt, going the "debt settlement" route can provide a welcome alternative to personal bankruptcy. As a form of debt relief, debt settlement differs greatly from debt consolidation. With debt consolidation, you are committing to pay back the entire amount of your debts, hopefully, at lower interest rates and at a pace you can afford. With debt settlement, the goal is to "settle" debt for significantly less than what you owe. Typically, debt settlement involves the "setting aside" of money each month to accumulate a lump sum amount that can be later used to extend a reasonable settlement offer to credit card companies.
A successful settlement can certainly save a considerable amount of money. But take note of the potential risks: While consumers are setting aside money and NOT PAYING their credit cards as promised, they could face legal action from creditors. In addition, credit ratings for consumers who fall behind will likely plummet. Finally, even if consumers are successful at getting a settlement for much less than is owed -- the money that is saved is subject to federal taxation.
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With all these downsides, why is settlement becoming so popular? Simply, for consumers at the brink of bankruptcy it may be a welcome and honorable alternative to defaulting entirely on their debt -- and while settlement can certainly damage credit, it does not have the same long lasting or severe an impact as personal bankruptcy.
The bottom line: When credit card companies decide to "sell off" what is termed "bad debt" to a debt collector, they will often get as little as ten cents on the dollar. It stands to reason, then, that credit card companies may be willing to accept a reasonable offer to settle from a financially-strapped consumer who is trying to do their best to pay what they can in an attempt to avoid bankruptcy. Here is a quick review of the pros and cons of settlement:
The Pros of Debt Settlement
- Can help consumer settle for much less and save money
- Provides a viable option to bankruptcy
- No upfront fees in "performance-based" debt relief model (This means that settlement companies cannot be compensated unless they secure successful settlements for the consumer)
- If settlements are not reached, there are no settlement "fees" unless you are getting relief via attorneys who you have met with in person as part of the "attorney-based" debt relief exclusion.
The Cons of Debt Settlement
- As you fall behind, negative reporting could continue to damage credit score
- If you default on payments, you could potentially be sued for being in default
- People already in debt are often very likely to have trouble "setting aside" a fund from which to make lump sum offers to the credit card companies.
Bankruptcy Pros and Cons
Bankruptcy, for many consumers, is often a last-resort option, and has a more damaging and longer lasting impact on one's personal credit.
- May help stop collection efforts
- Can give many a new lease on life
- Allows many to keep home, car, or other properties
- Credit card loss and inability to have new cards
- Inability to secure a home mortgage
- Remains on credit report up to 10 years
- Student loans and back-taxes do not qualify
- Provides new lease on life, but not without some long term financial implications
Bankruptcy is indeed a viable and important debt relief option, but should be carefully considered before proceeding.
Credit counseling agency, debt consolidation loans, debt settlement, bankruptcy -- are all viable debt relief options with their own set of pros and cons. The bottom line for anyone seeking satisfactory debt-relief is choosing the method best suited to you, your situation and your comfort level. To find out more about debt relief options, you can get a free debt relief analysis and savings estimate - at no obligation.