How to choose the best debt relief option

Pamela Jace By Pamela Jace, 29th Jun 2012 | Follow this author | RSS Feed
Posted in Wikinut>Money>Debt

If you are looking for the best debt relief option, then at first, you need to know - What are the available options? You will be able to select the best suitable option only if you have knowledge about them, like how one differs from another. Here is a brief introduction to some of the most talked about debt relief options, knowledge of which is necessary to choose what will be the most favorable option for you.

Debt management

When you start facing problems in managing your debts, you approach a credit counseling agency for tips to manage the finances. Even after following those tips, you cannot manage your finances, the counseling agency may offer you a debt management plan/program enrolling in which you can get out of debt just by making single monthly payments. What they do is, talk to your creditors to reduce the interest rates on your unsecured debts to some extent so that it becomes easier for you to pay them off. The single monthly payment you make to the company is distributed amongst your creditors on your behalf.

Debt consolidation

A debt consolidation program functions in the similar way with that of a debt management plan. However, you can also consolidate on your own with the help of balance transfer method. What you have to do is, with your creditor’s approval, you can transfer your high interest debts to a card with the lowest rate of interest. You can also take out a personal unsecured loan with a comparatively low interest rate and replace all your existing debts with the new one.

Interest rate arbitration

In case of interest rate arbitration, you take out a secured loan (such as, a home equity loan) and repay your existing unsecured debts with the loan amount. While doing so, you actually replace your unsecured debts with a secured one. While doing so, make sure you pay back the secured loan on time, as otherwise, you may lose the collateral.

Debt settlement

Debt settlement should be your preferred option when you want to become debt free very quickly. However, your credit score can get reduced by several points if you choose this option. You can either negotiate with your creditors to reduce the payoff amount or get help from a settlement company for the purpose. If you enroll in a settlement program, all you have to do is make a single monthly payment to the settlement company and every other thing is managed by the organization.

How to choose the best one

You can compare the debt relief options according to their pros and cons and how it will affect your specific financial situation. Based on the analysis, you can choose what option will suit you the best. For example, if you can repay the debts in full and need to take out a loan in near future, then debt management or consolidation is the best option. You can either take out a secured loan (as in case of interest rate arbitration) or choose balance transfer method. However, make sure you pay the secured loan before you plan to take out another one, as doing so, will make yourself more creditworthy to your future creditors. And, if you want to become debt free fast, since you don’t have enough money to pay off all debts in full, you can go for settlement. But, remember to take necessary steps to boost your score as soon as you repay all your existing debts.
However, you can choose bankruptcy if you have no means to repay your debts. Though it will reduce your credit scores to the maximum, yet it’ll enable you to make a fresh financial start. You can qualify for Chapter 7 or Chapter 13 depending on your financial situation with that of others in your state.

If you cannot make your mind regarding which option to choose, it is better to consult a financial adviser. He/she can analyze your financial status and guide you as to which option will suit you the best.

Tags

Best Debt Relief Strategy, Debt Free, Debt Relief Option, Get Out Of Debt

Meet the author

author avatar Pamela Jace
I love to write mainly on finance related issues.

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