Feeling like you can’t keep your head above water due to debt can cause stress. It can make it hard to sleep or have fun. It can cause tension in a relationship, too, when one or both partners are worried about the finances. There can be various reasons why your debts are out of control. It may be due to a divorce or the death of a partner. It may be the result of poor spending habits.
In many situations, changes to income are the underlying cause. Economic factors and COVID-19 have had this type of impact on many families. People have had their hours cut or lost their income completely. Even with unemployment, it isn’t always enough to stay on top of the bills. Medical bills can pile up fast and eat away at income. No matter the scenario, there are ways to cancel your debt now!
These seven types of debt restructuring can help you regain control. Take your time to learn about each of them. Identify the method which will work best for your particular circumstances. Ask questions, compare the pros and cons, and create a solid plan of action before you move forward. Getting out from under the pressure of debt is going to help you enjoy your life again!
Contact your Creditors
As soon as you know you are in financial trouble, reach out to your lenders. Don’t feel embarrassed to do so. Unless you ask, you don’t know what they can do for you. Call and talk to someone who specializes in accounts. Please contact them when your account is still current. They may defer payments for a few months if the situation is temporary. For example, you are out of work while you recover from surgery.
In other situations, the creditor can lower the interest on the account. This means more of what you pay will go towards the balance rather than good. If you can’t keep up with the payment amount, they may be able to lower how much you pay each month. It will take you longer to pay off the debt this way, but it can help you budget monthly to cover your expenses.
Negotiate Balances
There may be lenders willing to negotiate the outstanding balance with you. If you agree to their set terms, they will remove some of what you owe. Keep in mind; you will likely get a 1099-C from them at the end of the year. The forgiven balance will need to be reported on your tax return.
They may be willing to remove late fees and other charges on your account if you can come to a solution with them. If the account has already gone to collections, they may offer you a lump sum. You will have to come up with funds at once to pay it off, but they will drastically reduce the amount you owe. Once you pay them, the entire balance will be gone for that bill.
Debt Consolidation
When your monthly debts are higher than your monthly income, or there isn’t much left, you need to change. Debt consolidation may be a good option for you. This allows all of your unsecured debt to be lumped together. Make sure the overall interest rate you will pay for the loan is less than you currently pay.
To find out, use free calculator tools online. Enter the current balance and interest rate for each of your debts. What is the total you pay per month? How long will it take you to pay off as they are currently set up? Next, look at the consolidation offer. How much will you pay each month? How long will it take to pay it off? What is the total you will pay when all the debts are paid back?
With debt consolidation, you can get a lower payment. This eases your burden monthly with the bills you need to cover. It can give you some wiggle room with your budget for extras and put away for emergencies. When you get an excellent interest rate, you can pay off the debt in less time. This is because a considerable portion of what you pay goes towards the principle and not interest.
Debt Management Plan
If your debts are too high for you to continue to cover, debt consolidation may not offer enough relief. There are organizations available to help you with a debt management plan. They have agreements with various creditors. They do the legwork for you, negotiating your balance with them. In many instances, they can get interest rates slashed or eliminated. You will pay them a lump sum each month to cover the cost, and they will disperse those funds to the creditors.
If you go this route, thoroughly research the program first. Not all of them have the best interest of the consumer in mind. Instead, they are charging high fees and making lots of money because you have some financial troubles. Look for an organization with the best value for you.
Forbearance and Deferment
Many types of debts, including student loans, have options for forbearance or deferment. This allows you to skip payments for a set amount of time. After that agreed amount of time, you will go back to paying the payments again. During this agreed timeframe, no interest will accumulate, and your accounts won’t be reported as late to credit bureaus.
Home Equity Loan
If you have equity in your home, use it to your benefit! Borrowing against that equity allows you to have funds to pay for your bills. If you have a great interest rate, this can be the way to go. Typically, the interest rate is significantly less than on credit cards and other unsecured debt.
Chapter 7 Bankruptcy
The requirements for Chapter 7 bankruptcy depend on where you reside. Spend some time learning about the laws, if you qualify, and how to apply. Chapter 7 bankruptcy is a good choice for someone that can’t commit to the cost of restructuring their debts; they don’t have enough income for consolidation or debt management to work. This type of bankruptcy can wipe out unsecured debt, so you have a clean slate.
Conclusion
Which of the seven types of debt restructuring is best for you depends on various factors. Your current situation, amount of debt, type of debt, and monthly income must be evaluated. Don’t look for a short-term solution. Instead, select a method to help you find debt relief. If your debt has been due to overspending, make sure you change those habits. Otherwise, you will end up with a problem again with your finances.