Debt Help 101: What You Need to Know

The first thing you need to know about getting out of debt is that there’s no universal method for doing so. For every person who’s ever gotten out of debt, there’s a unique journey to match. The exact methods you implement to work toward becoming debt free depends on a host of factors, ranging from the type and amount of debt you’re carrying to your income, credit score and lifestyle.

While there’s no step-by-step model to follow on your own personal financial journey, you can start by getting an understanding of the basic methods available to you. This way, you can pursue the options best suited to your needs—and set realistic expectations for what the process will look like.

Welcome to Debt Help 101. Here’s what you need to know.

Debt Consolidation

For Americans with at least one credit card, the average number of credit cards is actually 3.7. This just goes to show how many people regularly juggle multiple balances every month—something that adds a layer of complexity to getting a handle on your debt. When you’re trying to keep track of multiple debts, each with its own APR and due date, it’s easy to inadvertently let things slip through the cracks.

One solution for people in this predicament is debt consolidation, which entails taking out a single personal loan with fixed repayment terms to pay off these other debts. This simplifies the process because consumers then only have to worry about making payments on a single loan with a lower interest rate to boot. However, this strategy does nothing to reduce the principal amount owed; you’ll still be paying your debt in full, just over a more extended period of time.

Debt Relief

Debt relief aims to reduce the amount of unsecured debt you owe. How? By initiating negotiations with creditors. Here’s how a program like Freedom Debt Relief works:

  • Build funds: Enrollees make monthly deposits into an FDIC-insured savings account they control.
  • Negotiate with creditors: When enough funds have built up, negotiators reach out to creditors on clients’ behalf, trying to settle debts for less than the original balance.
  • Settle: If a settlement is accepted, enrollees authorize and approve it.
  • Zero out balances: After settlements are paid from the dedicated account, enrollees no longer owe their creditors.

Some qualified participants are further invited to combine debt settlement with consolidation in a program like Consolidation Plus, which involves using a personal loan to reduce the amount of time it takes to settle debts.

However, consumers should note that settlement does not occur overnight; to find success in programs like these, they’ll have to commit to making monthly payments for a few years. These programs may also impact your credit—at least until after you zero out your balances so you can start rebuilding.

Do-It-Yourself Debt Repayment

Some people decide to face their debt without consolidation or settlement. The key to succeeding here is staying organized. Deciding upon a strategy and sticking to it will help you stay on course. Some people prefer to work their way upward from their smallest balance to the largest—all the while paying the minimum balance across the board to avoid racking up fees. Others tackle debts by interest rate from highest to lowest, a method known as debt avalanching.

Bankruptcy

The most drastic measure for putting your debt behind you is filing for bankruptcy. The obvious pro here is that part or all of your debt may be forgiven. But there are substantial drawbacks to consider, like the fact that this path will affect your credit score for years to come. You may also have to forfeit some of your property and assets. Plus, you’ll have to pay attorney’s fees. Explore other options before defaulting to bankruptcy.

The more you know about your options for debt elimination, the more able you’ll be to make an informed choice that works for you.

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