In January 2018, the Federal Reserve announced that outstanding consumer credit card debt had hit a new high over $1.023 trillion dollars. This means, on the whole, Americans owe a debt with 12 zeroes behind it—so if you are struggling or stressed out by your growing credit card debt, you’re definitely not alone. To figure out how to get out of debt, you first have to learn about the many options you have. Every solution is different, because everyone’s situation is different. This article aims to help you find the right way to get out of debt based on:
- Type of debt you have
- How much debt you owe
- How much income you earn
- How you deal with finances (in terms of your personality)
Keeping all of these in mind, let’s dive deeper into the 6 most common types of debt relief:
- Pay off the debt yourself
- Enroll in credit counseling / debt management plan (DMP)
- Get a debt consolidation loan
- Enroll in a debt settlement program
- Refinance your mortgage
- Declare bankruptcy
Pay Off Debt Yourself
Although there is a sense of pride in doing something without anyone’s help, paying off debt on your own may not be the fastest or most affordable solution, particularly if the debt you owe is ten thousand dollars or more. But it can be done, and is a way to pay off debt that you should know about. If you have a small enough debt and the income and discipline to pay it off, then you may want to try the “avalanche” or “snowball” methods of paying off your debt yourself.
- Avalanche Method: Each month, put any extra cash you have toward paying off the debt with the highest interest rate. Pay only the minimum on the other debts so you can channel as much money as possible toward paying off that highest interest debt. That way, you will eliminate the highest interest debt faster. Once you finish paying off the high-interest debt, then move on to the next highest interest rate and repeat the process.
- Snowball Method: Instead of focusing on paying off debt with the interest rate first, this method focuses on paying off the card with the lowest debt amount first. Once you pay that off, you pay off the next smallest amount, until you are able to tackle the largest debt. By paying the smaller debts first, you will clear out smaller payments faster and have fewer accounts to worry about.
Regardless of which method you use, paying off debt on your own takes time. This means you will be paying more in interest. Plus, if you are paying off credit card debt but still continuing to use the credit cards you’re trying to pay off, it will be very difficult to make progress—you sort of take two steps forward, one step back. And if an unexpected expense arises, it’s very easy to slip back and undo all the progress you’ve made.
Enroll in Credit Counseling/Debt Management Plan
Credit counseling works as a debt consolidation tool in that it blends all your enrolled debts into a single monthly payment, simplifying your monthly expenses. Credit counseling could also help you save money by reducing your interest rates with creditors. Also, this method could help protect you from creditor collection actions as well as prevent you from becoming delinquent on your debts, which could hurt your credit score. However, it’s important to understand that credit counseling, unlike other solutions like debt settlement (more about that later), does not reduce the principal amount of your debt—you will still owe that full amount.
A certified credit counselor can help you get lower interest rates that they have pre-negotiated with creditors, plus they can set up a payment plan for you to follow that fits into your budget. Additionally, through credit counseling, you can enroll in a debt management plan (DMP) for an additional cost. A DMP is a personalized program where the credit counselor will look at all of your enrolled debts and then work with your creditors to negotiate a lower interest rate for you, known as a “concession rate.” Then the amount you pay to the DMP each month will be based on the new concession rate(s). While a DMP involves a fee, it offers the benefits of reduced interest rates and the ability to focus making a single, affordable payment each month.
As you pay the credit counseling DMP service each month, they distribute the money to your creditors for you. In the end, you will pay back 100% of the debt, plus interest and the fees.
Working with a credit counseling agency may mean you would have to close some or all of your credit card accounts. Plus, it may impact your ability to open and use additional credit lines, as some lenders may view you as a credit risk. If you are already having a hard time affording minimum payments on your debts and aren’t comfortable with the fact that credit counseling may require you to pay even more each month, then this may not be the right option for you.
Get a Debt Consolidation Loan
A debt consolidation loan is a personal loan that can enable you to combine all debts into one monthly payment at a fixed interest rate. It’s important to understand that a debt consolidation loan will not reduce the amount of your debt—the total amount owed will remain the same. So this solution will not get you out of debt. It merely changes the type of debt you have; from a higher interest, variable rate to a lower interest, fixed rate.
The interest rate you are offered on a debt consolidation loan is key. Because in order to make a consolidation loan worthwhile, the interest rate needs to be lower than the average interest rate on your current debts.
Average interest rates on personal loans are 14%–18%, yet these rates can vary widely from as low as just over 4% annually (for people with exceptional credit) and up to 25% or higher (for people with poor credit). Your credit score will help you decide if this method is the right way to pay off debt. The higher your credit score, the better your chances of qualifying for a lower rate. A debt consolidation loan may not be a good option if you cannot qualify for an interest rate low enough to offer true savings.
If you do qualify for a low interest rate, a debt consolidation loan can help you save money over the course of time it takes to pay off the loan amount because you will be paying less in interest. And because a debt consolidation loan gives you a predictable single payment each month, it can make it easier to track your progress, making the management of your debt straightforward.
A debt consolidation loan doesn’t solve the core issue of how you got into debt, nor does it get rid of the debt itself. But it can help lower the interest rate on your entire debt, plus help you become current on your bills. But if you don’t have the credit score that enables you to get a low enough rate, this option may not make sense for you.
Enroll in a Debt Settlement Program
Debt settlement, sometimes referred to as debt resolution or debt negotiation, differs from all other debt solutions in that it can lower the principal amount owed. This lowered amount should make it faster and easier to pay off debt.
In fact, compared to paying off debt on your own, a debt settlement program could help you get out of debt years or even decades faster than making minimum monthly payments, depending on how much you owe. And while debt settlement can be considered a type of debt consolidation, it is not a loan.
Unlike a debt consolidation loan, debt settlement reduces and resolves the principle amount you owe with creditors. A debt settlement program won’t affect your interest rates with creditors, and you don’t need to have good credit to qualify. Once you have completed a debt settlement program, you are totally free of the debts you enrolled.
Here’s how it works: each month, instead of paying your creditors, you choose to make a monthly deposit into an FDIC-insured Dedicated Account that you control. A debt settlement program might seem similar to a DMP because there is a single monthly program payment. But a DMP pays your creditors with the funds you send them—a debt settlement company does not touch the money you deposit into your program account, which is administered by an independent third party payment processor.
Instead, the money you pay each month in a debt settlement program grows over time and your creditors stop getting payments from you. This can be a difficult part of a debt settlement program for some people, because when creditors don’t get payments, they start calling and may even sue you.
However, for a debt settlement program to effectively reduce the amount you owe, the accounts should go past due. Why? Because if they are receiving regular monthly payments on the debt, why would they be willing to settle for less than 100% the original amount owed?
As you continue to build up funds, the debt settlement company will reach out to creditors to offer a lower amount as payment right away. Since a creditor may be more interested in receiving some payment against your debt rather than continue to get no payments toward your debt, they may be willing to accept it. Different creditors settle for different amounts, and, as time goes on, they may be willing to except even less on the debt to consider it paid. Knowing the best time to ask for the lowest settlement is where the expertise of a professional debt settlement company comes in.
Some people are uncomfortable with the idea of paying less than they originally owed, as if they are taking advantage of the creditor or failing to meet their commitment. But this type of negotiation is done every day, and it is standard for most credit card companies. In other words, it’s just business for them.
Freedom Debt Relief is proud to be the leader in the debt settlement industry, having resolved more personal debt than any other company in the nation. Our proven program has enrolled over 500,000 clients since 2002.
At Freedom Debt Relief, we take a low-pressure, consultative approach to helping you settle and resolve your debt. After learning about your situation, including whatever hardships you’re dealing with that are making it hard for you to keep up with your debt, we create a custom program that offers you a great chance for success for how to get out of debt. And we work with you to find a program deposit each month that you can afford. Plus, once you enroll we stay with you every step of the way, with tools and resources that help you handle creditor phone calls, live within a tighter budget, and more. And of course, we do not charge any fees until a debt settlement has been negotiated/approved and a payment towards the settlement has been made.
You should know, however, that because a debt settlement program involves letting your accounts go past due, it could negatively impact your credit score. So if maintaining a high credit score is more important to you than putting your debt behind you, this solution may not be the right choice for you.
Debt settlement programs are designed for people who are behind or struggling to stay current on their debts due to a hardship, who are looking for a way to reduce what they owe, and to put their enrolled debts behind them once and for all. Once you complete a debt settlement program like the one we offer at Freedom Debt Relief, you are free of all the debts you enrolled and should be in a stronger financial position to begin improving your credit score.
If you think you fit the profile of someone who might benefit from debt settlement, find out if you qualify for our debt settlement program now.
Refinance Your Mortgage
If you own a home, then it may be possible to refinance your home and use the cash to pay off debt. To refinance, you’ll have to ensure you have fairly good credit to qualify for a good interest rate. Also, the home value will have to have increased enough so that you have enough equity to make refinancing worthwhile. There a few ways to approach this:
- Home equity loan
- Home equity line of credit (HELOC)
- Fully refinance the home for an increased amount
All of these options provide cash to pay your debts at, hopefully, a significantly lower interest rate, since credit card interest is typically higher than a mortgage rate. Plus, there may be positive tax implications since you may be able to write off some of the mortgage interest. Overall, refinancing can help provide a significant savings in what you’d pay on interest over the life of the debt. Additionally, like some of the other methods for getting out of debt, refinancing a mortgage offers to simply your debt into a single monthly payment.
Be aware that using your home to get out of debt can be very risky. First, if you can’t make the payments, then you will be at risk of foreclosure. Second, by refinancing you may add additional years of mortgage payments, which may be a concern if you’re preparing to retire. As you’ve only moved your debt, unless you address the underlying reason as to how you got into debt, refinancing a mortgage may jeopardize one of your largest asset.
Some view this as a resort for getting out of debt, which offers you the option to file either Chapter 7 or Chapter 13, depending on which one you qualify. Before taking this route, we advise you speak with a local licensed bankruptcy lawyer who will be familiar with the applicable laws in your state and county.
Sometimes referred to as “liquidation,” Chapter 7 liquidates qualifying assets to pay creditors—supervision of this process belongs in the hands of the courts, which may mean incurring legal fees on top of debt. Other than protecting any exempt assets, your non-exempt assets may be sold to pay off the debt. Again, consult with a local attorney to determine if you will be able to hold on to your property.
Those who do not qualify for Chapter 7, yet have a stable income may consider filing for Chapter 13, which is sometimes called “the wage-earner’s bankruptcy” because it sets up a plan—typically 5 years—to pay back creditors. This form of bankruptcy may make sense if you have large assets that may exceed state exemptions, such as your home, because it enables payment of the debt, while keeping your assets from risk.
If you decide that filing for bankruptcy is the right approach for your situation, it could help alleviate the burden of your debts and let you start anew. However, there will be a mark on your credit rating and it could take 7–10 years for it to be removed from your credit report.
Finding Your Debt Solution
There’s no one perfect solution for how to get out of debt—it all depends on your situation. Millions of people are struggling with high interest rate credit card debt, unstable employment, and stagnant wages, yet not everyone is actively looking for a solution. You are and that’s a huge step! Recognize that your debt does not define you nor are you powerless to get rid of it. Whether you do it yourself or need a little help, you can pay off and get out of debt.
Now that you know more about the most common ways to approach debt relief, keep exploring solutions to educate yourself as debt will not go away on its own. If you have any questions about any of these methods for getting out of debt, call us at 800-230-1553. We are here to help!
Talk with one of our Certified Debt Consultants who can walk you through the pros and cons for all of these methods. The call is free and there’s no obligation. It can be helpful to speak with someone who can answer your questions, so we encourage you to give us a call any time.
Freedom Debt Relief is committed to helping people defeat their debt. As the largest, most-established debt settlement company, we take pride in having enrolled over a half million people into our innovative program. We know that debt can be stressful, so we offer customer service 7 days a week to ensure there’s someone available to talk to. Plus, everyone who enrolls in our program gets a personalized online dashboard that provides 24/7 access to help them monitor their accounts and the progress we are making at helping you put your debt behind you.
To find out if our debt settlement program can help you save money and get out of debt faster fill out this online form or call us at 800-230-1553—we’re here to help get you on the road to financial freedom.