Consumers approach fresh solutions for eliminating debt when it becomes too much to manage. Debt consolidation is a worthwhile opportunity for consumers with the right credit scores. However, some non-traditional lenders may offer unique solutions that help consumers with less than stellar credit ratings. Individuals approaching the opportunities must review all the terms of the solution before signing on the dotted line. While some solutions present exceptional benefits, the consumer’s financial standing could block some options. Comparing all pros and cons of each debt relief solution shows consumers what choice is better suited for their circumstances.
What are the Advantages of a Debt Consolidation Loan?
Debt consolidation loans are a debt relief solution where the borrower gets a lump sum payment to pay off debts. They cannot increase their loan balance after the consumer accepts the offer. However, it is an efficient way to eliminate a higher volume of debt at once. Qualifying individuals get a higher loan amount, and the original creditors are paid in full. Consumers eliminate the closed and paid accounts from their credit report, and any negative listings are removed by the creditor or the credit bureau. Consumers who want to apply for a debt consolidation loan can read this blog right now.
What are the Pitfalls of the Loans?
Disadvantages of a debt consolidation loan start with an increase in interest if the consumer has lower credit scores. The primary purpose of the loans is to pay off debts, but it’s also to cut down on the interest the individual pays for each account. If they have poor credit scores, the individual could increase their debt volume instead of getting the benefits. Adding all debts into one account could also make the monthly payments considerably higher than individual accounts.
The consumer must calculate their total debt volume and consider if the debt consolidation gives them savings. Sometimes, paying individual debts off such as small debts helps the consumer eliminate debt without incurring more interest. Performing these calculations allows them to compare the balances and see what choice is more economical. It isn’t wise to get a debt consolidation loan if it will increase their debt volume because of higher interest rates.
A debt management plan helps consumers eliminate the unsecured debt that is under $1,000. Debt management companies negotiate with creditors to get debt forgiveness all the time. If the accounts are in collections, it could give them more leverage since the collection agencies are trying to collect whatever they can get from the consumer. Buying the accounts doesn’t guarantee a collection agency repayment, but it settles the debt with the original creditor. Most credit card companies use tax write-offs and insurance claims to mitigate the financial loss of the debt balance.
The drawbacks of discharging the unsecured debt are that the consumer might face some tax implications for the unsecured funds. Some jurisdictions may count the money borrowed through the credit card account as income, and the taxpayer must claim the money on their taxes if it is forgiven.
Settlement Offers Require Consumers to Have the Money
When accepting a settlement offer from a creditor or collection agency, the account holder must have the cash on hand to pay them. If they don’t have the money, there isn’t any point in accepting the offer. Consumers cannot make a promise to pay and receive the benefits of the settlement. When using a debt relief solution, third-parties negotiate with the creditor to lower the balance, and they discuss how much the consumer can pay. The consumer must fulfill their end of the arrangement, or the debt isn’t settled.
What Happens With Bankruptcy?
Financial planners advise against filing for bankruptcy whenever possible. Consumers shouldn’t use bankruptcy as an option to get rid of the debts unless they are facing foreclosure, repossession, or a lawsuit. Through a bankruptcy claim, consumers get an automatic stay that prevents all three legal actions by creditors. However, the asset must be included in the bankruptcy, and the consumer must get an exemption for the asset under bankruptcy laws.
When filing for bankruptcy, consumers only have two choices, liquidation or a structured repayment plan. With chapter 7 or liquidation, the court chooses the assets they sell to pay off the creditors, and the owner has zero control. With chapter 13, the court must approve the repayment plan for the consumer, and the claimant must follow every condition in the agreement besides using disposable income to pay any debts that aren’t in the claim.
Chapter 7 lasts six months, and unless the individual settles the debt in this time, they are responsible for it as soon as the case is over. Chapter 13 could last up to five years, and the consumer loses all control over their assets, their credit, and their disposable income. At the end of the bankruptcy, the consumer’s credit is destroyed, and they cannot get a mortgage for at least three years, and creditors won’t offer new lines of credit with decent interest rates. The bankruptcy stays on their credit for ten years, along with every debt that was involved in the bankruptcy.
Even if the consumer pays all these accounts in full, the accounts remain on their credit histories and block them from rebuilding their credit. Consumers shouldn’t use this option unless they are facing dire financial circumstances that have legal ramifications.
Consumers review debt solutions according to the pros and cons of each option. Their current financial standing plays a role in determining what opportunities are available. Consumers with poor credit scores could increase their debt volume unnecessarily by making the wrong choice. Some individuals may fail to review all solutions before getting started and make serious mistakes. Debt relief solutions could include debt consolidation loans, debt management programs, and even bankruptcy. Each of these selections can offer terrific help for consumers with high volume debt, but no two consumers are facing the same circumstances. Reviewing all solutions and weighing the pros and cons shows the consumer what option is right for their debt woes.