What Is Debt Relief?

Debt relief involves reorganizing or negotiating your debt in a way that makes it easier to repay. Depending on the type of debt relief you choose, you may be able to accomplish one or more of the following objectives:

• Combine multiple monthly payments into one
• Reduce your interest rate
• Lower your monthly payment
• Extend your repayment term
• Settle for less than what you owe
• Have your debts wiped out altogether

If you’re in need of debt relief, lenders are often willing to work with you, especially if the alternative is default. However, the types of debt relief that are available to you and the best path depend on your situation.

Types of Debt Relief

There are several types of debt relief you can use to work toward becoming debt-free. Depending on the severity of your financial situation and your ability to repay what you owe, one method may be better than the others. Here’s a quick summary of each and when you might consider them.

Debt Consolidation

Debt consolidation involves applying for a loan or balance transfer credit card and using it to pay off existing debts. This strategy works best if you can qualify for a loan or credit card that offers a lower interest rate than what you’re currently paying. Options include:

• Balance transfer credit cards: These cards offer introductory 0% annual percentage rate (APR) promotions that allow you to pay down your debt interest-free over a period of a year or more.
• Personal loan: A personal consolidation loan may offer a lower interest rate than what you’re paying now and a fixed repayment term.
• Home equity loan or line of credit: If you own your home, a home equity loan or home equity line of credit could be worth considering.

Debt consolidation is best for borrowers who have a manageable amount of debt and a relatively high credit score, which is necessary to qualify for favorable rates on a consolidation loan or credit card.

Debt Management Plan

If you’re having trouble making your monthly payments and your credit is less than perfect, working with a credit counseling agency could be a good next step. A credit counselor can help you with basic things like creating a budget and can also put you on a debt management plan to help you pay off credit card debt.

Debt Settlement

If you’ve already missed some payments and a debt management plan isn’t the right fit, you may consider debt settlement. With this option, you’ll attempt to negotiate with your creditors to settle your unsecured debt for less than what you owe.

Bankruptcy

If your debt situation is so dire that you can’t even afford to make modified monthly payments, bankruptcy may be the last resort option. There are two types of consumer bankruptcy—Chapter 7 and Chapter 13:

• Chapter 7: Most of your assets are sold to pay off whatever you can, after which the remainder of your debt is wiped out.
• Chapter 13: Your debt repayment plan is reorganized to make it affordable for you, and you must complete the new court-mandated repayment plan.

Is It a Good Idea to Use a Debt Relief Company?

Debt relief companies specialize in facilitating a debt settlement arrangement between a borrower and a creditor. However, missing payments for an indefinite period of time can damage your credit score significantly and cost you hundreds or even thousands of dollars in fees. As a result, it’s generally best to pursue other options or attempt to settle on your own.

Does Debt Relief Affect Your Credit Score?

Regardless of which type of debt relief you pursue, it’ll likely have an impact on your credit score. However, that impact can vary depending on what you choose and how you proceed:

• Credit inquiries: Applying for a new loan or credit card will typically involve a hard inquiry on your credit reports, which can knock a few points off your credit score.
• New account: Opening a new loan or credit card account to consolidate debt will affect your length of credit history.
• Credit utilization: If you move a balance from one credit card to another or pay off a card with a loan, the change in your credit utilization rate can either help or hurt your score.
• Closing accounts: If you have to close credit cards for a debt management plan, they’ll no longer contribute positive information to your credit reports.
• Positive payment history: If debt consolidation or a debt management plan can help you avoid missing a payment, they can contribute positively to your credit score.
• Missed payments: If you’ve missed payments leading up to a debt management plan, debt settlement or bankruptcy, they’ll remain on your credit report for seven years from the original delinquency date.
• Settlement or default: If you ultimately default on a debt or settle for less than what you owed, that means you didn’t pay the debt as you originally agreed.
• Bankruptcy: Bankruptcy can damage your credit score significantly. A Chapter 7 bankruptcy will stay on your credit reports for 10 years from the filing date, while a Chapter 13 bankruptcy will fall off your reports after seven years.

Consider Both Short- and Long-Term Effects

Getting out of debt sooner than later is always appealing, but depending on the potential negative long-term impact, it may not be worth it. As you consider which debt relief approach to use, think about the trade-offs for each one.

Check your credit score and credit report to get a better understanding of your situation, and research your options to determine the best one for you. If you’re having trouble figuring out the best path forward, consider reaching out to a credit counseling agency to get some basic advice based on your situation.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we understand that managing debt can be overwhelming. Our team of experts is here to help you navigate your financial situation and find the best solutions for your needs. Whether you’re looking to consolidate debt or need advice on managing your mortgage, we’re here to assist you.

Call us today at 213-732-3074 for any mortgage service needs. Let O1ne Mortgage be your trusted partner in achieving financial stability.