While most individuals do not realize it, the American consumer has many options available when choosing the best method to become debt free. Debt consolidation, debt settlement, and credit counseling are three of the most common options available for consumers that can no longer afford to meet their monthly financial obligations. The pros and cons of each will be discussed below in order to provide you with the information required to make an educated decision as to which option best suits their specific needs.
Debt Settlement:
Debt settlement, or as it is often referred to as debt negotiation, is most often performed by an attorney or debt negotiation company. There are two ways in which debt settlement can be accomplished. The consumer must already have the funds available for the attorney or debt negotiation company to use in its negotiation, or the consumer can make monthly payments into an account that has been reserved for the attorney or debt negotiation company to use in its negotiation.
There are two specific benefits to debt negotiation/debt settlement. The first benefit is that you have the ability to stop making monthly payments to the creditors you plan to settle with, in turn creating more discretionary funds available for your use on a monthly basis. The second benefit is that the majority of consumers should expect to save between 50 & 60% of the total amount owed. The attorney or debt negotiation company will be able to start settlement procedures immediately, should you have the funds available. But should you not have the funds available, the attorney or debt negotiation company will start settlement procedures with your creditors as you start making regular deposits into your settlement account.
Once a settlement is reached with your creditors, the attorney or debt negotiation company will release one payment in order to settle the debt. While the savings created by debt negotiation/debt settlement may be quite attractive at first glance, it is important to understand that it will most certainly have a serious derogatory impact on your credit report. Each and every month that you choose to ignore your creditors and deposit money into your settlement account will show up on your credit report as a late payment. Eventually, that account will be charged-off, sent to an collection agency or attorney, and then be reported on your credit report as a collection account. You will most definitely have a very limited amount of time to settle the collection account once it has been handed over to an collection agency or attorney. While there are numerous issues to be considered at this point, it would be reasonable to expect the collection agency or attorney to proceed with legal action, file a warrant-in-debt, and attempt to obtain a judgment against you. Should the collection agency or attorney obtain a judgment against you, it will also be reported negatively on your credit report. It is very important that you understand late payments, collections, and judgments will severely damage your credit report for many years in the future.
Debt Management:
Debt management companies, often referred to as credit counseling companies, attempt to save the consumer time and money by allowing you to combine all of your unsecured monthly debt and make one, lower monthly payment to their debt management company. It is imperative for consumers to understand that credit counseling companies do not provide consolidation loans. Rather, the credit counseling company takes your payment and divides the money up between your creditors, with whom they have often negotiated lower interest rates and payments with.
While taking advantage of the services offered by a reputable debt management company can save you time and money, it is also imperative to understand the potential pitfalls & problems associated with using the services of a credit counseling company. One of the major issues you should be aware of is that using the services of a credit counseling company can potentially have a derogatory impact on your credit report. In fact, most mortgage underwriting guidelines consider credit counseling companies to be the same as if the individual had filed for chapter 13 bankruptcy. Further, it is also imperative to realize that your responsibility for making payments on time has not been waived by choosing to use the services of a credit counseling company. Should the credit counseling company make your payments late, whether because of a simple mistake or negligence, it will most definitely be reported and be reported in a negative light on your credit report.
Debt Consolidation:
Debt Consolidation can be a great option to become debt free but should not be done hastily and must be done with careful planning and forethought. There are numerous ways to consolidate debt. The most common debt consolidation methods are: obtaining a Home Equity Line of Credit (HELOC), obtaining a signature/personal loan, or transferring the balances of higher interest rate credit cards to one with a lower interest rate and high available credit line.
Obtaining a Home Equity Line of Credit (HELOC) can be a creative method to consolidate debt. While the interest rate & associated payment on most HELOCs is relatively low, most consumers do not understand how much money will be paid over the life of the credit line. That said, HELOCs also have a huge benefit over other debt consolidation alternatives. One of the most beneficial benefits to using a HELOC to consolidate debt is that the interest paid on the HELOC can be tax deductible in specific situations.
A signature/personal loan is another good available option when choosing to consolidate debt. While a signature/personal loan may be a realistic option, a high credit score will certainly be required. The interest rate will definitely be much higher than that of a Home Equity Line of Credit but more than reasonable when considering that it is not collateralized. You can rest assured that the payment will be much higher than that of HELOC. You cannot write off the interest on your taxes.
Transferring the balances on your high interest rate credit cards can be a fair option but not always the best option for everyone. Obviously, you will need another card with an available credit limit high enough to consolidate your debt. It is also imperative that you choose a credit card with a reasonably low interest rate. The majority of cards have balance transfer offers that can be extremely low over a given period of time. While these offers can be quite attractive, it is important to understand that they are typically for a very limited period of time. These offers can also be dangerous because once you have maxed out the card, it will definitely be difficult to transfer the balance at a later date. Many consumers find themselves trapped in this situation and unable to pay off the balance in full before the low, introductory interest rate increases to the fully indexed rate. For this reason, many consumers end up defaulting on a debt consolidation method of this type.
As you can see, there are various options available when choosing the best method to become debt free. Each of these methods have pros and cons that should be considered when trying to decide which method best suits your specific needs. As you can imagine, it is imperative that you consider each carefully and develop a good plan prior to making your decision. And, do not be afraid to ask for help should you need the assistance of a professional financial specialist.
Alexander Wright is a professional article writer that has been involved in article writing and providing free information on credit restoration and credit report repair. Alexander writes for Credit Restoration Bureau (CRB), a professional credit repair organization located in Virginia Beach, VA. CRB has helped thousands of American consumers get a fresh start through effective credit repair. Credit Restoration Bureau is staffed with professional credit repair experts and can be contacted at: 1-888-342-6758.
Author: Alexander Wright
Article Source: EzineArticles.com
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