Understanding and choosing the right debt relief option is the first step in paying back debt and regaining financial stability. With a little clarification on what options are available and the often confusing terminology, consumers can make an informed decision that works for their unique situation. In an effort to help, let’s discuss the types of debt relief programs and options available to get free from consumer debt.
Unsecured vs. Secured Consumer Debt
It’s important to understand what these terms mean in reference to consumer debt. Unsecured debt describes the type of loan not backed by an asset; secured debts are loans backed by an asset, such as vehicle and home loans.
If consumers default on a secured loan, lenders will repossess the backed asset as compensation for any outstanding debt owed.
Unsecured debts come in the form of credit cards, school loans, medical bills, and department store credit cards. Since there’s no collateral involved with this type of debt, lenders use fees, interest rate hikes, collections, garnishments, liens, and lawsuits to collect from consumers.
State of Consumer Debt in the U.S.
According to a CNBC article and infographic, the average U.S. household owes $16,883 in credit card debt and the average American has a credit card balance of $6,375.
An article on Money explains the total amount of debt Americans owe is $13 trillion in 2017; this includes, mortgages, car loans, credit card debt, student loans, and other debt.
In terms of consumer debt, an article on The Balance explains:
In October 2018, U.S. consumer debt rose 7.7 percent to $3.964 trillion.
…Of this, $2.926 trillion was non-revolving debt, and it rose 6.7 percent. Most of non-revolving debt is education and auto loans. In September 2018, school debt totaled $1.564 trillion and auto loans were $1.143 trillion.
Credit card debt totaled $1.037 trillion, increasing 10.7 percent. It exceeds the record of $1.02 trillion set in 2008. But credit card debt is only 26.2 percent of total debt. It was 38 percent in 2008.
Overall, the amount of consumer debt Americans owe is growing, especially with school and vehicle loans. The economic recovery since 2008, low-interest rates with auto loans, and school loans being taken over by the federal government, have all factored into this equation.
Debt Relief Programs and Options
While each situation will differ when it comes to the amount and type of debts owed, the good news is there are always positive steps consumers can take to get out of debt. The first step is to understand the debt relief programs and options available, including:
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DIY
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debt consolidation
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debt counseling and management
- filing bankruptcy
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debt settlement
DIY
The do it yourself (DIY) option is viable for consumers who are financially savvy and have enough time to manage their debts. Basically, this involves developing a plan to manage and pay off debts, as well as contacting creditors to negotiate or resolve outstanding debts.
The DIY option takes time and effort from consumers, yet it gives them full control over handing their debts. There are many resources consumers can use to educate themselves on how to manage and repay their debts, yet there’s a steep learning curve involved that takes time and effort.
Generally, by the time consumers are seeking debt relief help, the DIY option has already been used and found inefficient. They may lack the time and knowledge to manage this task and/or their debts have reached an unmanageable level with defaults, collections, etc.
Debt Consolidation
This debt relief option can be part of a DIY plan. Essentially, this involves taking out a lower interest loan to pay off multiple higher interest loans.
Depending on the amount of debt owed and their credit score, consumers can get a credit card with a 0% interest introductory rate to transfer other debts onto. They can also get a personal loan with a low interest rate to pay off credit cards, medical bills, auto loans, and department store credit cards that either have higher interest rates or are in default.
The main benefits of using this debt relief option are saving money on interest and simplifying the management of debts. Instead of making multiple payments at different times, consumers can simply make one consolidated payment each month.
Debt Counseling and Management Programs
Another debt relief option for consumers is to work with a non-profit organization to manage the repayment of their debts. These organizations and programs will contact and negotiate payment plans with each creditor and establish a consolidated monthly payment for consumers to pay.
Unlike the last consolidation option, the number of creditors consumers have will remain, yet like the last option, they’ll only have to manage one payment per month to satisfy all of their debtors. This means consumers won’t save as much from reduced interest, nor will they benefit from completely paying off most of their debts.
This is a good option for consumers who have outstanding debts, poor credit scores, and don’t have the knowledge or time to effectively manage their creditors. These organizations and programs are there to help consumers better manage their money and get out of debt.
Filing Bankruptcy
As a last resort, consumers can always file Chapter 7 or 13 bankruptcy as a debt relief option; this will cancel most of the unsecured debts they owe. The cons of filing bankruptcy are:
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stays on credit score up to 10 years
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costs consumers from $1,000 to $5,000 to file and for lawyer fees
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doesn’t cover all consumer debts (student, vehicle, and home loans remain)
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consumers will lose any nonexempt assets
Chapter 7 is the most common for consumers with no assets and who make under a certain amount per year, as all assets deemed nonexempt will be sold to repay debts. Chapter 13 allows debtors to keep their assets with a repayment program set in place, yet is only available for higher income earners.
Debt Settlement Programs
Another debt relief option for consumers is to use a debt settlement program. This can be accomplished as part of a DIY program or with the help of a trusted debt settlement company. This option involves negotiating with each creditor to agree upon a reduced settlement payment to satisfy the total amount of debt owed.
This is a good option for consumers who have outstanding debts piling up and don’t know what to do. Once debts are in default, creditors charge fees and higher interest rates, making it even more difficult for consumers to pay off their debts. Eventually, the debts go to collections and debtors begin taking legal actions against consumers resulting in lawsuits, garnishments, liens on assets, and degraded credit scores.
Instead of ignoring these unresolved debts and falling victim to these actions, consumers can proactively work with a debt settlement company to negotiate settlement payments with their debtors for them. Debt settlement companies have the expertise and experience needed to advocate for consumers and get optimal settlement deals.
This option will help consumers resolve their outstanding debts without spending an inordinate amount of time dealing with creditors. Additionally, a quality debt settlement company won’t even charge a fee unless they can save consumers money.
Debt Blue is a quality debt settlement company that can help consumers get out of debt and gain financial freedom. We understand the issues consumers face when dealing with outstanding debts and creditors, and we have the expertise and experience to negotiate optimal settlement offers for our clients. If interested in learning more please contact us today.