The 6 Top Debt Relief Options to Clear Your Debt

What are my debt relief options? When you reach a point where you know you are having trouble with your debts, how do you figure out which option is right for you, and how do you compare risk, time, out-of-pocket, and short term/long term credit impact?

There are a number of different debt relief options, and they span the spectrum from low-risk, row reduction in payment, as compared to higher risk but in some instances higher reduction in payment.  Its important to review all of your options and see how they fit into your financial situation.

Summary of Debt Relief Options for Individuals:

  1. Request an interest rate reduction from existing credit cards
    1. Plus:  No credit impairment; its easy; and if your debt isn’t too far outside of your budget, this can be enough to get the balances under control
    2. Negative:  No change to balance, not a huge difference in monthly payments
  2. Refinance debt with a new lender / aka “debt consolidation loan”
    1. Plus:  No credit impairment, usually reducing the interest rate on the debt, and puts several debts into a single payment
    2. Negative:  Often not available option if debt is already behind.  No debt reduction
  3. Debt Settlementcreditor agrees to pay off a debt for a reduced amount
    1. Plus:  close out the debt for a reduced amount.  credit impact is better than non-payment
    2. Negative:  Have to be cautious about terms of settlement.  Should make sure you aren’t paying on an uncollectible debt.  Not as good for credit as paid in full.  Debt settlement can have tax consequences.
  4. Debt Consolidation Planmake monthly payments to a debt facilitator who negotiates several debts for you.
    1. Plus:  Generally results in paying off several debts that usually are already behind at a discount.  Get the benefit of a professional negotiator and take the stress off your shoulders.  Payments are designed to be in your budget.
    2. Negative:  Similar to Debt Settlement.
  5. Chapter 7 Bankruptcy
    1. Plus: Get rid of your debt with no payment plan.
    2. Negative:  Have to meet qualifications.  May not qualify if your household income is too high.  May have to give up “extra” assets as trade off for eliminating debt.
  6. Chapter 13 Bankruptcy
    1. Plus:  Get rid of your debt with a payment plan designed to be in your budget.  Can file even if over the income qualification for Chapter 7.  Can keep the assets you may otherwise have to give up in chapter 7.
    2. Negative:  3-5 year commitment.
OK – so now lets break these options out into a little more detail…

The Low Impact Debt Relief Options:

1.   Request an interest rate reduction from existing credit cards

This is a great place to start, particularly if you are still up to date.  It won’t make a huge difference in monthly payments, but reducing the interest rate can mean a real reduction in your out of pocket over the course of time.  Like Wayne Gretzky said, “you miss 100% of the shots you don’t take.”  There is no harm in calling your credit card companies to ask if they will reduce your interest.

2.  Debt Refinance / Debt Consolidation Loan

Particularly if you have a number of debts, this can be a good option to simplify what you owe to a single payment, and hopefully reduce the interest rate as well.  There is no adverse credit impact, and no litigation risk.  The one thing I’d caution you on is not to get into the “rob Peter to pay Paul” trap.  Don’t refinance your loans just to build the balance back up on the accounts you pay off.  That will quickly put you into debt quicksand, building the balances up beyond what you can handle.

The Medium Impact Debt Relief Options:

3.  Debt Settlement

Particularly if you have been behind for a period of time, it can be possible to settle on your debts.  While sometimes, this can present an opportunity to pay off a balance for a reduced amount, it can also present some added risks.  So what are the risks?  First, by virtue of being behind, it can be possible that the company collecting on the balance may file a lawsuit.  Second, you have to make sure that any settlement offer is legitimate – that it is from a company authorized to make the offer, and that the deal is what they say it is.  You also should make sure that it is still a valid debt, and that it isn’t too old to be collectible.  Finally, in some instances, settled debt can result in a 1099.
If a debt is already in a lawsuit or judgment, it can still be possible to settle on the debt, but at that point you should really consider getting professional assistance.

4.  Debt Consolidation / Debt Management Plan

Debt Consolidation is like debt settlement, but usually a professional is assisting you with the negotiations, and you are making a monthly payment into an escrow account for them to negotiate with.  This is a good option to eliminate debt at a reduced amount, particularly if bankruptcy may be a mismatch.  The risks are similar to debt settlement; however, particularly if the professional assisting you is a lawyer (like us!), some of these risks may be mitigated.

The higher impact Debt Relief options

5.  Chapter 7 Bankruptcy

In many instances, Chapter 7 is the fastest and least expensive option to wipe the slate clean.  Chapter 7 is known as the “liquidation” chapter of bankruptcy.  In order to file Chapter 7, there is an income qualification.  Additionally, the trade-off in chapter 7 is that in exchange for wiping out your debts, you are limited on the assets you can keep.  Chapter 7 will have a negative impact on credit, but it also clears all of the balancing on a credit report, which often allows filers to build their score back up fast than they otherwise would if the accounts just stayed on the report.  Usually Chapter 7 is a helpful option for issues with unsecured debt.

6.  Chapter 13 bankruptcy

Chapter 13 is known as the reorganization chapter of bankruptcy.  In a nutshell, it takes all of the debts and puts them into a payment plan that goes between 3-5 years.  The plan is based mostly around what the filer can afford.  If the debts are not paid in full by the end of the plan, the balance is usually discharged (except student loan, which seem to be able to survive a nuclear holocaust).  Chapter 13 is a good option for secured debts (your mortgage or car loan) if they are behind and you want to keep them.
So what debt relief option is right for you?  You guessed it – it depends on your circumstances.  Our firm focuses exclusively on solving debt problems.  Schedule a free 1-on-1 consultation with a qualified attorney today to explore your options and find an affordable way to get in control of your debt.

Call Now for a Free Case Evaluation
Clearwater: (727) 538-4188 | Tampa: (813) 225-3111