What is Debt Counseling?
Debt counseling isn't your only option. There are multiple solutions for those stuck under the burden of heavy debt, including debt consolidation, debt settlement, bankruptcy and more. It's important to know what your alternatives are before you decide how to handle your debt. If you're ready to resolve your debt, but need some help figuring out how, call Freedom Financial today. Our certified debt specialist may be able to help you find a solution that suits you.
Consolidation Alternatives
Debt Counseling
Debt or credit counseling agencies can help by slightly lowering your monthly payments. It's a good solution for those that need a little relief from their monthly payments. However, if you're already struggling to make your monthly payments, this might not be a good option for you, as it doesn't change your overall debt amount. Debt counselors can negotiate with your creditors on your behalf to lower your monthly payments, and suggest ways to change your budget, but your debt will remain the same. If you feel like your payments are too high, and you know you can make them consistently if they were just a bit lower, credit counseling could be for you. Just know that lowering your payment may extend the length of time and, depending on your interest rates, the amount of money you pay.
Debt Settlement
Also called debt relief or debt resolution, debt settlement could help reduce the amount of debt you owe and help you resolve that debt in less time, in some cases as little as 24 to 48 months*. Negotiators, like Freedom Financial, will work with your creditors on your behalf to lower your debt amounts. In the meantime, you'll save money into a payment program account that you control. The money in the account is used to help negotiate lower debt amounts.
Debt negotiation can often be the cheapest way to resolve unsecured debt while avoiding bankruptcy. Monthly program payments could be lower than your current minimum payments, and fees aren't charged until you start seeing results. Debt settlement could adversely affect your credit score though, especially if you don't complete the plan or if you're current on all your unsecured debt. If you want to resolve your unsecured debt quicker than simply making minimum payments, for a possibly lower total cost, debt settlement might be what you're looking for.
Bankruptcy
Usually viewed as a last resort, bankruptcy can help you resolve debt, but it does come with some negative side effects. First, the record of your bankruptcy stays on your credit report for a long time—up to ten years. Second, changes in bankruptcy law have made qualifying for Chapter 7 bankruptcy more difficult. Chapter 7 bankruptcy is the type of bankruptcy that can completely discharge your obligation to repay your debts. Due to the changes, more people are forced to file Chapter 13 bankruptcy, which is actually a reorganization of your debts. You will still need to repay at least a portion of those debts over time. Talk to a licensed attorney in your state to find out if bankruptcy is right for you.
Minimum Payments
Another last resort option is minimum payments. While it may seem easier–many credit cards have minimum payments as low as $15, some even lower–it will cost you more in the long run. Adjusting your finances to scrape by on just the minimum payments could keep you afloat, but it will also keep you in debt. Going on just the minimum payments can change a payment timeline from a couple years, to more than a decade. For example, if you owed $1,500 on a credit card with interest rate of 19 percent, and you only paid the minimum payment of $15, it could take you more than ten years to pay it all off. You'd end up paying hundreds of dollars in fees and interest. Making minimum payments can be a good solution for the short term, but to get out of debt quickly, you might want to look for a different solution.
Debt Counseling FAQs
Question: Can all of my debt be consolidated?
Answer: Most unsecured debt–medical bills, credit card debt, collection accounts–can be consolidated. It may be possible to consolidate secured debt, like a mortgage or car loan, but it is not recommended. Consolidating secured debt with your unsecured debt could put your collateral (e.g., your home or car) at risk if you fail to make payments.
Question: Will I pay less with credit counseling?
Answer: That depends. If you can secure a good interest rate, and you make timely payments, you could end up paying slightly less each month, but your overall amount will likely remain the same. Be aware that your monthly payment might be lower, but the length of time you have to repay the loan is increased, which means may end up paying much more in interest in the end.
Question: Will credit counseling improve my credit score?
Answer: There are a number of factors to consider when it comes to credit scores, so credit counseling is not guaranteed to improve. Still, paying the full amount, on time, is never a bad thing.
