Do you have knots in your stomach over your financial situation? Sleepless nights? Creditors calling? You need a plan to manage your debt. And if bankruptcy is on your mind, it’s time to do your homework and see if it’s the best solution for your financial woes.
There are plenty of warning signs that your financial situation is deteriorating, but for Charles Phelan, founder of debt settlement and relief company, ZipDebt, an inability to financially plan for the future is a huge indicator that you need to make a change.
“Are you saving anything for your retirement? If you’re not able to put any money away, that’s a long-term disaster,” Phelan said.
But not being able to save for retirement doesn’t mean you should automatically be headed toward bankruptcy. There are some good reasons to think about alternatives. Bankruptcy will cause your credit score to take a big hit and Chapter 7 bankruptcy comes with the risk of losing your house. Chapter 13 bankruptcy is inflexible and will mean having to follow a court-ordered repayment plan for up to five years.
Here are some other options to consider to manage your debt:
Manage your debt with a debt snowball
If you have a steady income and the ability to make payments on some of your debt, a debt snowball could be a good plan of attack. What you do is pay the minimum on each of your debts per month, but pay extra toward your smallest debt until you’ve paid that one off. Then you move on to the next smallest debt, adding what you were paying toward the previous debt to that payment. You repeat the formula until you pay off all your debts.
Some advocate applying the extra cash toward your highest interest debt first, and then move on to the next highest interest account after the first debt is cleared.
Manage your debt with a debt consolidation loan
If you’re looking for some breathing room to keep up with your debt payments, a debt consolidation loan could be a good option. With this method, you roll up all your unsecured debt into one new, lower-interest loan. The goal is to get a loan with a better interest rate than your existing debts so that your monthly payments will be lower. To make that happen, you’ll probably need good credit — a score of 670 or higher.
You’ll also need to commit to repaying the loan and to not using the credit lines that you just paid off. If you pay off your loan as agreed, your credit score won’t be hurt as it would with bankruptcy.
Debt management plan
If you have the ability to pay off some of your debt each month, and stick to a repayment plan, you may want to consider a debt management plan. With a DMP, a credit counselor at a counseling agency negotiates with your creditors to lower your monthly payments through reduced interest rates and/or reduced fees and penalties. You then make one monthly payment into an account held by the credit counseling agency and they pay your creditors. These plans can last between three and five years and are generally inflexible, meaning if you miss a payment you could lose the negotiated benefits. So it’s important to make sure you can make these payments each month.
Debt management plans have the benefit of not being harmful to your credit the way bankruptcy would be.
Although you can settle your debt on your own, many people use debt settlement companies to negotiate with their creditors. The goal is to get your creditors to agree to settle your debt for less than what you owe. Sometimes that means giving creditors a lump sum payment, or repaying them over a longer period.
Many debt settlement companies will want you to stop making payments on your debt and instead put that money into an account to act as your lump sum settlement offer. The risk there is that you could be sued in the time it takes to save up the money and your credit score will continue to take a hit. And if you agree to a repayment plan, and you miss a payment, your agreement could be cancelled.
“I feel strongly that debt settlement is best looked at as an alternative to Chapter 13 bankruptcy,” Phelan said. That’s because debt settlement is usually shorter than Chapter 13, which can last as long as five years and has a huge failure rate, he said. With debt settlement you also have a shot at keeping open a credit line or two.
If you’re struggling with debt, bankruptcy is an option, but it’s not your only option. To manage your debt, it’s a good idea to explore several debt relief programs to find the best fit for your financial situation.
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.