If you don’t manage your finances properly, then you’ll not be able to make regular payments, which results in incurring huge debts and late penalties. If you're one of them who is suffering from massive debts because of living a lavish life, then this blog post is for you.
Debt relief companies provide services to help people get out of debt. 3 popular debt relief services are:
These options are discussed below in brief.
1. Debt consolidation program
Debt consolidation method is recommended for people who are unable to manage multiple bills and forget the date of payments. In this method, your multiple debts will be merged into a single monthly payment at a lower interest rate.
How can you consolidate your debts?
You can consolidate debts in 3 ways:
- 1. Getting enrolled in a debt consolidation program
- 2. Taking out a consolidation loan
- 3. Opting for balance transfer method
You need to approach a consolidation company to enroll in a debt consolidation program.
When you enroll in such a program, the company will offer a free analysis of your income and expenditure to check your affordability to pay off the debts.
During the counseling session, you can ask your queries regarding fees and monthly payment amount. If you agree to the service terms and conditions, then you need to sign up to get the services. After completing the basic formalities, the company will start negotiation with your creditors to get a lower rate of interest on your debts. After reducing the interest rate, the consolidation company will fix a payment plan for you.
You need to start paying a certain amount to the consolidation company every month and it will disburse the amount to your creditors.
Thus, you’ll get rid of your unmanageable debts after a certain time.
Shopaholic Tanya incurred $30,000 during her graduation. After completing studies, she tried to pay off her credit card bills by taking out a payday loan. But, she failed to pay off the loan within the time and accumulated $20,000 debt. She again took a personal loan from a bank and incurred $25,000 debt.
After missing few monthly payments, she realized that she can't manage the burden of her debts and contacted a debt consolidation company for help.
She worked in an advertising company and was earning a good amount of money. The consolidation company helped her to get rid of debts very fast because she had a good income stream and followed the payment plan provided by the company.
Her total debt and the interest amount was:
- Credit cards: About $30,000 @ 25% interest rate
- Unpaid payday loan: About $20,000 @ 15% interest rate
- Unpaid personal loan: About $25,000 @ 20% interest rate
- Total debt: $75,000
And Average interest rate: 25% + 15% + 20% = 60% / 3 = 20%
After negotiation with the creditors, the consolidation company reduced interest amount to
- Credit card debt: $30,000 @ 23% interest rate
- Unpaid Payday loan: $20,000 @ 10% interest rate
- Unpaid personal loan:$25,000 @ 10% interest rate
- Total debt: $75,000
And Average interest rate: 23% + 10% + 12% = 45% / 3 = 15%
The consolidation company asked Tanya to pay $3,000 to the consolidation company. She agreed to pay the amount. It included professional fees.
So, she saved 5%* $75,000= $3750
Tanya made the payments every month and was able to repay debt in about 5 years.
2. Debt settlement program
If you're going through a bad financial situation and have already missed several payments, then debt settlement might be the best choice for you. In this debt relief option,
the total debt amount will be reduced. So, you’ll be able to repay your debts with ease.
How can you settle your debts?
When you approach a settlement company to settle your debts, at first, the company will assess your financial condition to understand your affordability.
After signing up, you’ll have to pay an agreed amount to the company every month. It will deposit the money into an escrow account.
In the meantime, the settlement company will contact your creditors to reduce the payoff amount on your debts.
After a significant amount gets accumulated in that escrow account, the company will pay off the debts, one by one.
At the age of 22, Derrick Jennings graduated with about $80,000 in credit card debt.
- Credit card A - $30,000
- Credit card B - $20,000
- Credit card C - $15,000
- Credit card D - $15,000
- Total $80,000
He tried to negotiate with the creditors, but failed. After that, he hired a debt settlement company to pay off his 4 credit cards. After assessing Derrick's financial situation, the settlement company asked him to pay $2000 every month.
The company negotiated with the creditors and reduced the amount to:
- Credit card A - $20,000
- Credit card B - $15,000
- Credit card C - $10,000
- Credit card D - $5,000
- Total $50,000
After 3 months, the company paid off the credit card D. Derrick paid off his other 3 credit cards within 3 years.
Confession of Derrick:
"I made a promise to myself that I won’t be living a lavish life, which I used to do, and would pay off all my debts. So, I never missed monthly payments. Since I got a good job, I could afford the amount. But, I no longer lived an extravagant life. I made small purchases and stopped eating outs. I was determined to get rid of my debts. I have got rid of my debts and have started a fresh financial life with the help of the debt settlement company."
3. Debt management program
Debt management program is similar to debt consolidation program. Like debt consolidation program, you'll get a lower interest rate on your debts. Debt management program helps to eliminate debts by negotiating with the creditors to lower the interest rate and to eliminate fees. Also, you can repay multiple debts through a single monthly payment.
How can you get rid of debts through the debt management program?
In a debt management program, your financial situation will be assessed, for free, by the representative of the debt management company, which you’ve chosen. You'll be asked questions regarding your household income and expenses.
You'll be provided money management tips and budgeting tips to get back a good financial life. They will plan a suitable budget and a payment plan that you need to pay to the company each month.
Once you start paying to the company, the money will be distributed amongst the creditors based on the agreement.
Debt success story of a newly parent with the help of a debt management company
Newly parent Laura and John Smith felt devastated after getting rejected by the mortgage lender due to the bad credit score. The couple had some bills such as unpaid rent, 2 car payments and $60,000 due bills in 5 credit cards. Some add-on expenses were hospital bills, daycare cost, nursing, medicines, etc.
They wanted to but a new home but they decided to pay off the credit card debts to get better mortgage terms. But they didn't know from where to begin. Finally, they went to a credit counseling agency and took a free counseling session. They came to know about their financial situation and got a budget. The counseling agency offered a debt management company for further help. The company negotiated with the creditors and was successful in reducing a significant amount of interest.
The newly parent followed a budgeted life for the next 3 years, sold one car and paid all credit card debts by making single monthly payments to the counseling agency
They confessed that they headed in the right direction and the credit counseling session helped a lot to understand the situation properly. Now, they are debt free and are saving a certain amount of money for the down payment on the mortgage to buy their dream house.
Make sure you read all the terms and conditions and know the fees before working with a debt relief company. Check the authentication of the company before signing up any agreement. Try not to agree on an unrealistic repayment plan, which will end up with a more financial mess. Browse online to check the review of the company and also check out that the company follows FTC rules and regulations.
You can take this quiz to test your knowledge regarding debt relief solutions. The knowledge will help you choose the best debt relief solution for you.