California is known for its beautiful cities and the idea of living in the state is attractive. However, behind its ability to captivate lies the highest living costs in the nation. Paying for your basic needs while overcoming other expenses can be challenging. If you are in debt, you understand the feeling of struggling to pull through each day with creditors constantly calling to demand payment. Most people file for bankruptcy when their debts catch up and making it difficult to pay.
Bankruptcy is a legal proceeding that allows you to eliminate liability for unsecured debts and make good payment plans for the secured debts. Although bankruptcy can provide a fresh financial start, declaring bankruptcy will cause severe inconvenience, including damage to your credit score. Before you opt for bankruptcy, looking into other debt-relief options would be wise to help you manage the debt and reorganize your financial life.
Debt relief provides an essential lifeline for individuals who struggle with minimum payments and are forced to use credit cards to pay for personal expenses. Not all debt relief solutions are right for you. Therefore, you must consult a bankruptcy lawyer before proceeding with a debt relief plan. If you have overwhelming debt, you can explore the following debt relief options before settling on bankruptcy:
Debt consolidation
Debt consolidation involves combining multiple high-interest debts into one payment. It would be wise to consolidate your debts if you can have lower interest on the newly combined debt. There are two main ways through which you can consolidate your debt, including:
- Balance transfer credit. This involves transferring all the debts to one credit card and paying the balance within a proportional period.
- Debt consolidation loan. You can use the money from the new loan to pay off the pending debts and then pay off the loan over time.
The success of your debt by consolidation strategy depends on the following:
- The monthly payments for your debt must not exceed 50% of your income
- Your credit card is enough to qualify for low-interest consolidation or a 0% credit card
- You can pay off your debt within five years with the consolidation plan
Some of the benefits of using debt consolidation as your debt relief option include:
- You save money. The primary goal of seeking debt consolidation is to save money. Actions like having a balance transfer credit card could offer you an opportunity to pay your debts with 0% interest. However, you must pay the debt within the introductory period of eighteen months. Once the introductory period ends, the balance your creditor will charge interest to the loan balance.
- Simplify your budget. When juggling several loans and credit cards, it is easy to miss a bill. Missing a payment for your loan can significantly damage your credit score. Paying the monthly installments becomes easier when you roll up multiple debts through debt consolidation, and the possibility of missing a payment is lower.
- You settle your debts faster. When you move forward without a payoff plan, you can feel as if you aren’t making any progress with the repayment of your loans. However, when you consolidate your debt, you can set a timeline to pay it off.
- Increase your credit score. A credit score is a reflection of your ability to pay your debts. Before offering you a loan, a creditor may look into your credit score to determine your eligibility. Consolidating your debts allows you to keep your credit utilization low to ensure no adverse effect on your credit score.
- Low monthly installments. Although you can pay off your debt faster with the consolidation option, you can consolidate for a long time, meaning you pay small and manageable monthly payments. However, you must understand that a more extended repayment plan causes you to incur more interest.
Although debt consolidation offers many long-term benefits, there are circumstances when the plan is unsuitable for your situation. Unlike bankruptcy, debt consolidation will not end your debt problems and will not address the underlying cause of your debt accumulation. Additionally, some debt consolidation loans attract extra costs such as balance transfer fees, annual fees, and closing fees. Before you seek a debt consolidation loan, you must inquire about hidden costs.
Your bankruptcy attorney may recommend debt consolidation if you have a good credit score and prefer payments with a fixed plan. If you have no means to pay off your debts, you should explore other debt-relief options. Before you sign a consolidation offer, you must review the minimum monthly payments and the length of the payments. You should then compare this information with what you could incur for a consolidation loan.
Debt Management
Debt management is a way to pay your high-interest debts without taking out additional bank loans. Your debt management plan will reduce the interest on your credit cards to 8% and allow you to make affordable installments for three to five years. Non-profit counseling agencies analyze your income and expenses before offering you a debt management plan.
If you enroll in the plan, you must make monthly deposits used to pay your debts within a schedule created by your creditors and credit counselor. Your credit counseling agency plays a significant role in your debt management plan, including:
- Thoroughly reviewing your situation to determine whether debt management is the best option
- Work with your creditors to reduce interest on your loans and waive or reduce penalties for late or missed payments
- Your counselor acts as the link between you and your creditors to arrive at acceptable and affordable monthly payments
- Guides you throughout the repayment process to ensure that you do not miss out on the payments
The effectiveness of a debt repayment plan varies in different situations. Some of the advantages of using a DMP for debt relief include:
- You enjoy credit card consolidation without accumulating more debt from bank loans
- Debt management keeps you more organized and increases punctuality
- Making timely and regular monthly installments when paying the debts improves your credit score
- A debt management plan helps you make reasonable monthly payments
- If you have been missing out on payments, a DMP will help keep your accounts current
- When the court allows you to make a repayment plan, creditors must stop calling and making other debt collection attempts
Like bankruptcy and other debt-relief options, debt management is not for everyone. The following are setbacks associated with this debt relief plan:
- You must close your credit cards after establishing the repayment plan.
- Failure to make the monthly installment as per the plan could adversely affect your credit score.
- Debt management is coupled with credit counseling. The credit counseling agency can charge an enrollment fee and monthly maintenance fees.
- You cannot access new credit lines before you cover the debts.
If, after consulting your attorney, you decide that debt management is the right option, a credit counselor will help you enroll in the plan. There are various debt management plans, so you must choose the one you feel comfortable with. Before contacting your chosen company, you must list your expenses and monthly income. You can obtain the accurate amounts through our bank statements and pay stubs.
Debt Settlement
Debt settlement is an agreement between you and your lender allowing you to pay less than what you owe. Opting for debt settlement is an option for bankruptcy, especially when creditors cannot leave you alone and are constantly. Depending on the amount you owe and other circumstances of your situation, debt adjustment can range between 10-50% of the total debt. You can either settle your debt or allow a debt settlement company to do it for you. If you hire a debt settlement firm to settle your debt, you must pay a 20-25% fee to the company after settling your debt.
If you have been making payments for your debts, you will have lower bargaining power for reducing your debt amount compared to creditors who haven’t made a single payment. Therefore, the first step towards settling your debt is to stop payments. However, it is vital to understand that halting your payments will affect your credit score.
Failing to pay your debts can accumulate interest and late fees, which adds to the balance. The court does not offer you an automatic stay when you show your debt settlement interests. Therefore, defaulting on your payments will attract debt collection acts. If a creditor sues you, you could suffer wage garnishment. Debt settlement offers the following benefits:
- You pay less than what you owe.
- Debt settlement is the cheapest debt relief option compared to a repayment plan or credit counseling.
- You receive a fresh start on your financial life.
- Creditors can no longer sue you for debt collection
- You can avoid the negative consequences of bankruptcy
Setbacks of Debt Settlement
Managing your debt and financial life with a debt settlement plan is not glamorous. You need to be aware of the following setbacks in moving forward with this option:
- Patience is key. Funding an account for debt settlement can take up to 48 months. Therefore, you must exercise patience before the whole process plan pans out.
- Ignore creditors. Creditors will still attempt to collect payment for the debts before you complete your debt settlement. Therefore, you should not feel pressured to continue making payments.
- You are not guaranteed that your creditors will allow a lower settlement
- When you enlist the services of a credit repayment company, you must incur extra costs to pay for the services
- When you seek a new credit line, your potential creditors will find out about the settled debt, which can affect your ability to secure credit.
Debt Relief Through Bankruptcy
If you do not have a stable income or the means to pay your debts even after a debt reduction or the development of a payment plan, bankruptcy may be your only debt relief option. There are two main types of bankruptcy. Chapter 7 bankruptcy is available for individuals with a low income and involves property liquidation. When you file for bankruptcy under this chapter, the court appoints a bankruptcy trustee who sells your assets to pay creditors. After the payment of your secured debts, the remaining debts are erased. Although liquidation bankruptcy erases your debts, this option has several disadvantages:
- Bankruptcy does not erase debts such as student loan debt, owed taxes, and child support obligations.
- A bankruptcy stays in your credit score for up to ten years. With a poor credit score, acquiring new credit is challenging.
- If you have a property that you want to keep, this chapter of bankruptcy is not suitable for you.
If you do not qualify to file for bankruptcy under chapter 7, you can file under chapter 13. Unlike liquidation bankruptcy, chapter 13 bankruptcy allows you to make a plan to repay your debts. Although this type of bankruptcy will not erase your debt, you can keep up with your payments without dealing with constant calls from creditors.
Find a Skilled Bankruptcy Attorney Near Me
Debt relief plans allow you to manage your debts and organize your financial life without dealing with the setbacks associated with bankruptcy. Anyone struggling with debt can apply for debt relief since credit approval is unnecessary. Some debts that qualify for relief include medical bills, credit card debts, personal loans, and other debts that aren’t backed by collateral.
A debt relief plan may involve settling the debt or modifying your interest rates and payment plan. You can explore different debt relief plans to break free from your financial burden, including debt consolidation, credit counseling, and debt settlement. Unfortunately, debt relief is not always the right option for you and can worsen your financial situation. Therefore, before you decide to move forwards with debt relief, you must seek legal guidance.
At Sacramento Bankruptcy Attorney, we understand the challenges of dealing with debts while financing other aspects of your life. Our skilled attorneys will help you understand the dynamics of each debt relief option and guide you toward choosing the option that best suits your situation. We serve clients seeking legal guidance to navigate bankruptcy and all its alternatives in Sacramento, CA. Contact us today at 916-800-7690.
