When debt has become overwhelming, where do you go for help?
In some cases, you can work directly with the creditor yourself. Often they are interested in making arrangements with you so they will be paid. Sometimes this is the most effective way to clear your debt.
However, when you have many creditors and are not comfortable with calling each of them yourself, there are debt relief services in place to make the arrangements for you.
This first type of debt relief is called debt management or credit counseling. They have trained personnel who will review your accounts and work with you on how you might restructure your budget and expenditures. They counsel you about what expenses may be outside your budget and discuss with you what cuts you can make. Sometimes debt problems are just a matter of making poor decisions regarding how you spend your money.
Debt relief services are available to help you determine what options are available to you. In addition to counseling, the debt relief service also has programs to help reduce your interest rates and monthly payments. Debt relief services have relationships with your creditors and can negotiate these adjustments.
A second type of debt relief is called debt consolidation. In this case, your debts may be so large that you cannot possibly pay all the monthly payments within your budget. Two options are available. One is to consolidate or add up all your debts and then acquire a loan to pay them all off, leaving you with one new loan that has a smaller total monthly payment. Then, rather than dealing with several creditors, you will have just one loan and one payment. It is designed to have a payment that will fit your budget and may have to be a long term loan in order to get your monthly payment down to a reasonable level. The only drawback is that because the loan may be extended over a long period, the additional interest you will incur causes the total loan to be a much larger sum than if you had paid your bills off directly. This option is often considered to be quite expensive over the long run.
Another type of debt consolidation loan is a mortgage or equity consolidation loan. If you own an home, you can use the equity (or amount already paid toward the mortgage) and use this lump sum to pay of all types of other debt such as credit cards. The benefit is that the interest rate on credit cards is usually much higher than the rate on your home mortgage. You end up with the debt paid off, and just one payment on the equity loan on your mortgage. The drawback is that your home loan is starting over again, and you still have the total debt, it is just consolidated into one loan with a lower interest rate.
Bankruptcy is a final option. Most try to avoid this option since it severely affects your credit rating and is listed on your credit report for ten years. Nevertheless, this option may be necessary in drastic situations. Unfortunately, the new bankruptcy laws now make it harder to declare bankruptcy for most. Certain income levels and property ownership restrict many benefits of bankruptcy.
A debt relief service can help you determine which is the preferable option for you. Each option has its benefits and drawbacks, and once your loans are paid off, not incurring further debt is the main goal.