When debt starts to get out of hand, the time to take action can hit pretty quickly. We’re often faced with a rapidly-narrowing window of opportunity and limited choices for how to mitigate the problem, which is why debt is so often referred to as a “downward spiral;” by the time it becomes an in-your-face issue, it’s probably too late to fix easily.
Debt relief comes into the picture around this time, usually offering a change in the terms of loans/credit lines or some other modification in repayment that’s designed to get the borrower back on track. For those who have already tweaked their budget, cut expenses, and prioritized repayment but still can’t make progress, this is often the only remaining option.
Among the types of debt relief available, you will likely come across debt consolidation, bankruptcy, and debt management. These choices are each vastly different in their execution, benefits, and drawbacks. That being said, how does someone in need of debt relief know which option is best? The truth is that every financial situation is so unique that there is no single, best choice.
If you’re unsure about your own financial situation, we recommend consulting with a professional before making your choice. In the meantime, it’s a good idea to familiarize yourself with the possible remedies:
This is essentially the “do-it-yourself” option that’s often called upon in less-dire situations. Debt consolidation can be done through a loan, or by signing up for a no-interest, no transfer-fee credit card that can then become the repository of all current debt.
Of course, these options require a workable credit score, which puts them out of reach for many with debt troubles.
Bankruptcy can be effective, but it’s pretty much the “nuclear option” for debt relief. While a Chapter 7 bankruptcy can eliminate most debt, it will also wreck the borrower’s credit score for years. It typically takes 10 years or more to reestablish credit after a bankruptcy, and that’s assuming a person doesn’t fall into similar bad habits and start the cycle all over again.
It should also be noted that a bankruptcy will pass debt along to any cosigners, and that certain types of debt are not eliminated in a bankruptcy, including child support, back taxes, and most student loans. We highly recommend speaking with a bankruptcy attorney in depth before considering this option.
This option is typically administered by a credit counseling firm and involves repayment of the debt with lower interest rates and/or waived fees. Debt management is much like DIY debt consolidation except that it’s handled by a third party.
While the credit counselors should have relationships with credit card issuers that allow them to work deals in the borrower’s favor, there are also some pitfalls: some debt management plans can still damage your credit, and you will need to live without credit cards during the repayment process (your accounts will almost always be closed.)
The means of escaping debt-related problems are almost as numerous as the means by which we find ourselves troubled by them in the first place. Not every option is suited to every individual, which is why it’s critical to seek out professional advice before embarking down any path.
The first step is recognition, of course. Once a person has acknowledged a financial problem – either impending or current – then steps can be made to turn the problem around. Honest examination of one’s own fiscal health is crucial, and awareness can be counted among the most important tools in the proverbial box.
Christopher has an MBA from a top Canadian University and a decade of Big 5 banking experience plus another decade of marketing knowledge. She has a passion for writing about financial topics and has founded and developed the brand of Underbanked®.