Using debt relief tactics is an option before filing for bankruptcy. There are several legal and financial routes you can take, and you have some legal protections as you try paying down debts. If you are worried and financially troubled with massive debt or student loans, learning about debt relief could be the right option for you.
It can also be a good idea to learn your rights under debt collection laws at this time. This can be a tricky field to navigate, and companies often try to take advantage of worried consumers facing debt.
Remember: No matter your total debt; you have rights against debt collector harassment as you work toward being debt-free.
Learn about additional topics below:
- What Is Debt Relief?
- Are There Any Programs for Debt Relief?
- Don't Know Where to Start? Review Your Finances First
- Making a Budget
- Deciding Which Debt to Pay Off First
- Debt Negotiation
- Learn More About Related Topics
Debt relief is any structured plan to pay down your overall debt amount. These options can be undertaken yourself or with professional help and can include:
- Repayment plans or programs
- Debt Management Plans (DMP)
- Credit counseling services
- Creating and sticking to a budget
- Creating a personal plan to pay down debt
- Debt negotiations (handled personally or by a professional company)
- Refinancing debts (such as a mortgage or loan)
What Are Other Options for Debt Relief?
An attorney can help you decide which options are right for you. Bankruptcy is one legal option to deal with financial problems. An attorney can review your situation and tell you if a Chapter 7 or Chapter 13 bankruptcy is the best way forward.
If your debt is not making everyday survival hard, you may want to consider debt relief before filing bankruptcy.
If your debt is beyond controlling on your own, you can discharge most debts in Chapter 7 bankruptcy or pay them back with a clean slate in Chapter 13.
For those who are deep in debt, you might consider debt relief programs. One example is consumer credit counseling to:
- Educate yourself on debt
- Ask bigger-picture financial questions
- Learn to manage day-to-day cash flow challenges
Several debt counseling organizations are classified as "nonprofit," but that does not necessarily mean they offer free, affordable, or even legitimate services.
There are many credit counselors and debt consolidation agencies that claim to help consumers reduce their debt. Unfortunately, some of these counselors are scammers. To protect yourself, use an agency listed on the DOJ's list of approved credit counseling agencies. You can also ask a local bankruptcy or consumer rights attorney for recommendations.
Be sure to leave enough for daily necessities like food and gas. Once you have a real idea of your debt and expenses, you'll be able to determine exactly how much you can put toward your debt.
If you still need some time to figure out how to best use your "debt payment money," consider setting up a separate saving account so you won't be tempted to use it on other things.
If you're working on cutting down your debt, making a budget is an essential first step. Creating and sticking to a budget is also an important way to avoid debt in the first place.
By mapping out your regular expenses, you can get a clear picture of your finances and act accordingly.
You can consider:
- Prioritizing your debts
- Reviewing your income vs. expenses
- Planning ahead for holidays on a budget
- Reducing and managing your expenses
- Avoiding excessive spending
- Refinancing your loans
If you choose not to file for bankruptcy, you will be paying off your debt by yourself or with other debt-relief options. The decision to pay down your debt is a great first step toward getting your finances under control.
One of the most common questions people ask themselves when they decide to tackle their debt is, "Where do I start?" Of course, all financial situations are different, making that question difficult to answer in simple terms.
Some possible ways to handle debt include:
- Knowing what kind of debt you're dealing with
- Figuring out what will give you the most significant boost (such as paying your highest-rate bad debt first)
- Considering the effect on your credit score
- Recommended order for paying off debts
You need to identify the types of debts you have and the consequences of defaulting on them. Most "consumer debts" typically fit into one of these broad categories:
- Secured Debt: The lenders for secured debts have an ownership interest in your property. The most common types of secured debts are mortgages and car loans. When you can't keep up with payments, the lender can repossess the collateral property.
- Back Child Support: Every state has a different enforcement policy, but failing to pay child support almost always has serious consequences. Child support rarely gets reduced, although many states will modify monthly payments or create unique payment plans.
- Back Taxes: Tax collection agencies take tax debt seriously and often charge huge interest rates on unpaid taxes. You can sometimes work out payment plans to pay down tax debt.
- Student Loans: Many student loans offer flexible repayment options.
- Back Utility Payments: Many utility companies will tolerate two or three missed payments, but the company may cut you off if too many are missed.
- Unsecured Debt: This category includes almost every other kind of debt, such as credit cards, medical bills, and personal loans. Lenders may increase your interest rates, charge late fees, or simply sue the delinquent borrowers. Unlike secured debts, unsecured debts aren't secured by property, meaning lenders have nothing to repossess should you fail to repay the debt.
Carefully review the penalties for not paying these debts. While debt is not a good thing, you sometimes need to choose which debts are the most serious and have the worst consequences and tackle the rest later.
Debts often grow at different rates and have different consequences for missing payments ("defaulting").
For example, throwing your limited cash at the wrong debt can put you in deeper debt. Debt can get worse due to the interest and penalties that may accrue on your other loans.
Take the time to seriously consider — and calculate — how you want to pay down your debts, including:
- Paying on loans for everyday necessities
- Fulfilling your legal obligations
- Starting with high-interest-rate debts
- Paying your deferred loans
1. Pay for Necessities
Many borrowers have fallen behind on their mortgage payments, car loans, or utility payments. If you miss too many of these payments, the creditors can foreclose on your house, repossess your cars, or shut off your utilities.
However, most of these loans have lower interest rates than other types of consumer debt, such as credit cards. This means that your "debt load" on these loans will grow at a slower rate than that of your credit card debt.
As a result, many bankruptcy and consumer debt attorneys advise making the minimum payments necessary to keep your house and car, and keep utilities on while working on other debts.
Borrowers can often negotiate with banks to work out a new payment schedule or reduce the loan's total amount. Of course, if you are current on these debts or have already worked out an alternate payment schedule, it's best to stay on course.
If you are far behind on payments, some creditors or lenders will choose not to apply your new payments to the debt. If you think this is happening to you, you should speak with an attorney right away. You want payments to apply to the debt, not to new money owed.
You may also want to consider setting up a separate savings account to keep your payments in until you are sure the money will be applied correctly.
2. Fulfill Your Legal Obligations
Once your day-to-day debt has a plan, think about the money you legally owe others.
Child support and tax payments are serious obligations. These are rarely discharged in bankruptcy, so you will face these debts no matter what option you choose. Fortunately, most child support and tax collection agencies are willing to work with you to create a payment plan that fits your budget. If you have a payment plan worked out, be sure to follow it exactly.
Failure to make tax or child support payments can have devastating consequences, including:
- Raised interest rates on your debt
- Wage garnishment (taking money from your paycheck before you get it)
- Jail time
You need to carefully consider each creditor's claims.
3. Pay Off Debts Starting With the Highest Interest Rate
Now that you've made sure you can stay in your house and take care of your legal obligations, you can work on paying down the rest of your debt.
For many people, the largest part of their debt burden is made up of credit card debt. This type of debt typically carries an interest rate between 20% and 30%. As a result, most credit card debt is often made up of late fees and accrued interest, rather than the cash borrowed. The banks that issued the credit cards can significantly reduce your credit card debt and avoid suffering any actual loss.
In such cases, the banks typically require you to make a lump-sum payment. Agreeing to this reduction may have tax consequences.
If you don't have the cash on hand to make these lump-sum payments, simply pick the loan or credit card with the highest interest rate and put as much money as you can toward that debt. Once that debt is paid off, cancel the card and move on to the loan with the next highest interest rate.
You may also consider combining your loans with a debt relief option. This involves taking out yet another loan, using it to pay off your existing debt, and then paying the consolidation loan off over time.
Many borrowers prefer this option since it's often easy to find a loan with a better overall interest rate. Also, having to keep track of only one loan instead of several is a relief for many debtors.
4. Pay Your Deferred Loans
Finally, most student loans allow you to defer payments if you are in difficult financial times. The loan will still accrue interest while in deferral, but usually, the interest rate is lower than those of other types of debts.
Once the rest of your debt is under control and you have a steady income, you can resume payments on your deferred loans.
You may be able to reduce the overall amount you owe by negotiating directly with your creditors. Your main goal should be to try to delay or minimize monthly payments until your finances improve.
Be aware that these kinds of delay tactics may provide temporary relief in the short term but typically increase the interest you pay in the long term.
For credit card debt and other unsecured debt, there are two options:
- Negotiate with the lender to reduce the total amount you owe in exchange for an immediate lump sum payment. Be sure to check with an accountant or attorney to learn about this action's possible tax consequences. This is often called "debt settlement" and there are debt settlement companies who can do it for you.
- Get a debt consolidation loan. This means you take out another loan, use the cash to pay off all your existing debts, and then pay off the consolidation loan over time. A consolidation loan typically has an overall lower interest rate. Also, it's easier to keep track of one loan rather than several.
You can do this research and negotiation yourself or consider hiring an attorney or debt negotiation company.
How a Bankruptcy Attorney Can Help With Debt Relief
Sometimes, despite your best efforts, you'll need to seek professional help. You should talk to a professional if:
- You've been diligently making your debt payments but see no improvement in your financial situation
- You're in danger of losing your home or being sued
Feeling like you're drowning in debt can be stressful, but there are ways to get some relief.
If you have questions about how to pay off debt or need help filing for bankruptcy, you should consider speaking with a skilled bankruptcy attorney in your area.