Debt has the power to leave you feeling anxious, defeated, and helpless. According to a study completed by the American Psychological Association, 72 percent of Americans will feel stressed about debt at some point in their life. Are you part of that statistic?
Whether you are experiencing crippling hospital bills, high credit card debt, or are suffering from losing a job, there are steps that you can take to reduce your debt.
Reducing your debt has the power to change your life for the better and reduce the negative emotions that you may be experiencing. Keep reading to learn more about debt reduction and see if it is the right option for you!
What is Debt Reduction?
Debt reduction, also known as debt relief, is the process of coming up with a plan to manage debt that you are no longer able to manage on your own.
The goal of debt reduction is to help you reduce or eliminate your debt in a quicker and more convenient manner.
Here are a few different types of situations that may warrant debt reduction.
- Losing your job
- You are unable to meet the minimum on your monthly payments
- You are thinking about filing for bankruptcy
- You have unforeseen hospital expenses
Finding yourself in one (or multiple) of these situations can be difficult and stressful. Luckily, you do not have to handle your debt reduction alone and there are several different methods of debt reduction for you to choose from.
Types of Debt Reduction
In order to start tackling your debt, you will first need to review the different types of debt reduction and then decide which method could be best for you.
Some of the most common methods of reducing debt include debt settlements, debt consolidation, credit counseling, refinancing, and bankruptcy.
If you choose to manage your debt using a debt settlement, you will deposit your money directly into a trust account instead of paying the creditors.
At the same time, a third-party company will work to negotiate your debt down which you will then pay in full using the money from the trust account.
Here are some of the benefits of reducing your debt via a debt settlement.
- Lower total debt amount to pay
- Prevent bankruptcy
- Allow the third party company to work directly with creditors/collections
While there are pros to taking a debt settlement, there are also cons. Here are some negatives to consider first.
- Some creditors may not agree to reduce your debt
- You may end up facing late fees or extra interest
- Possible negative impact on your credit
Another option for getting out of debt is to consider doing debt consolidation. Debt consolidations work by taking out a debt relief loan to cover all or multiple of your current loans.
Having one loan instead of multiple will allow you to have one interest rate and one bill to pay monthly.
If you are worried about being approved for a debt consolidation loan because of a bad credit score, fortunately, there are plenty of creditors that will offer very bad credit loans. Even if you have bad credit, debt consolidation still could be an option for you.
Here are some of the benefits of debt consolidation.
- One loan payment instead of multiple
- One interest payment instead of multiple
- Less of an effect on your credit score.
Here are some of the cons of debt consolidation.
- May not actually reduce your debt
- It could be difficult to get approved for a debt relief loan
While you sometimes find yourself in financial situations that are out of your control, a lack of financial knowledge can also contribute to having unmanageable debt. If that is true in your situation, credit counseling might be the best debt reduction option for you.
Credit counseling works by spending time with a coach to learn how to better manage your finances and get out of debt. The counseling agency may also help to ensure that your debt is being paid on time.
While credit counseling may educate you, provide a lower interest rate, and ensure that your debts are being paid on time, they might not be able to reduce your total debt and you could lose access to using your credit cards.
Refinancing your debt is a method that you can use to lower your interest rate. To refinance your current debt, you can call the creditor and see if they would be willing to give you a better interest rate.
Having a lower interest rate will allow you to pay less money over time and pay your debt off sooner rather than later.
Bankruptcy is typically a last resort option to dealing with debt because it can have serious effects on your credit score. In order to declare bankruptcy, you have to legally state that you are unable to pay your current debts.
Declaring bankruptcy will relieve all of your current debts. Some benefits to declaring bankruptcy are that it gets processed quickly and most (if not all) of your current debts will be relieved.
The cons of declaring bankruptcy are that there will be long-term effects to your credit score, it may require liquidating some assets such as a car or house, and you may no longer qualify for credit cards and loans.
Is Debt Reduction Right For You?
Now that you understand the different types of debt reduction, what is the best way for you to clean up your debt? Because every person’s situation is unique, the best method of debt reduction will depend on your needs and goals.
While there are several different options for debt reduction, Alleviate Financial focuses on providing debt settlements. If you are interested in learning more about the debt settlement options available to you, get started with debt relief today!