There is a point at which debt can hit critical mass for Californians and become nearly impossible to resolve simply by making monthly payments. Or worse, circumstances can congeal into situations in which maintaining debt a payment is no longer possible. Those are the times when it’s a good idea to become familiar with debt relief options and their consequences in order to choose the best path forward.
Your Options and the Consequences of Debt Relief
What is Debt Relief?
Strategies crafted specifically to help people deal with overwhelming debt in California are referred to as debt relief. The primary examples include credit counseling, debt management, debt consolidation, debt settlement and bankruptcy protection.
Lets take a look at each one.
Credit Counseling – These non-profit agencies exist specifically to help people find ways to better manage personal finances. They provide budgeting assistance, as well as financial literacy instruction. Credit counselors will sit down with you, assess your position and help you find the best path forward in terms of debt relief.
In situations in which the money cannot be found in your budget, a counselor might recommend debt management. While credit counseling organization are usually not for profit, they do charge fees for their services.
Debt Management – This strategy involves handing your bill paying activities over to the credit counselor, who will negotiate with your creditors for lower interest rates, reduced monthly payments and other concessions to help satisfy the obligations.
This can make your debts easier to manage and save you money.
However, creditors will report the concessions to credit bureaus and future lenders will be made aware that your debts were under management. Moreover, you’ll be asked to refrain from opening new credit accounts and in some cases you could be barred from using your existing accounts until the process is complete.
Debt Consolidation – Giving new meaning to the phrase e pluribus Unum, (Latin for out of many, one) this form of debt relief for Californians can meld all of your credit card and other types of unsecured debt into one loan.
The advantage here is usually a lower monthly payment, as well as lower interest payments. Debt consolidation most often takes the form of either a personal loan, a home equity loan, or a balance transfer credit card.
Personal loans are secured only by your promise to pay, which means they typically carry higher interest rates than home equity loans. However, your credit score must still be really strong to make a personal loan make sense. People with lower credit scores will be required to make higher interest payments, which could negate the purpose of the consolidation.
Home equity loans can usually be had at lower interest rates and the credit score bar is a bit lower as well. However, debt consolidation with home equity will transform unsecured debt into secured debt. In other words, your home will be listed as collateral and can be seized and sold if you fail to meet the terms of the loan.
Balance transfer credit cards allow you to move as many of your outstanding credit balances as possible onto a single card, usually at a super-low (often zero percent) interest rate. However, you’ll only have a year or so to pay off that transferred balance in full and still get the benefit of the introductory offer.
After that, the regular interest rate kicks in, which is usually well north of 20%. Moreover, some of the cardholder agreements stipulate interest payments going all the way back to the date of the initial transfer if the balance isn’t paid in full.
One thing to keep in mind with consolidation—your debt is restructured, not eliminated. In other words, you still owe the money. This is why it’s a good idea to avoid buying things on credit until you’ve paid off the consolidation loan. Otherwise, you’ll only make the problem worse, although you might not realize it right away.
Debt Settlement – Similar to debt management, in that you’ll hand over payment of your creditors to a third party, debt settlement goes a step farther. The negotiator you hire will ask your lenders to forgive as much of the debt as they can in exchange for a one-time payment in full of the agreed-upon settlement amount.
Many creditors will agree to debt forgiveness because they’re aware of the fact that the next time they hear from you will be a bankruptcy filing. They know they could get nothing at all when that happens, so they’ll often elect to settle for something instead.
Rather than paying your creditors directly, you’ll deposit the money in an escrow-like account from which settlement payments will be made. A deal will be struck once the balance of the account is sufficient to support a settlement offer.
This means there could many months between when you stop paying creditors and the debt is settled. Those missed payments will be noted in your credit history and affect your credit score negatively. On the other hand, if debt settlement is your most viable option, your score has already taken a hit.
Bankruptcy Protection – This is usually considered the final solution. While it can wipe out all of your unsecured debt in one fell swoop, a bankruptcy filing will impact on your credit history for up to ten years. This can make it difficult to get a new place to live, a car loan, a job and even insurance in some instances.
Ultimately, each of these debt relief options has consequences you’ll need to consider before choosing one of them. Credit counseling holds the greatest promise for resolving debt issues with but mild consequences. However, you must to be in a position to follow through—which is true of all of these approaches to debt relief for Californians.