When debt takes over your budget, it usually becomes a force that consumes everything and does not allow you to concentrate on something else. It is impossible to concentrate on work, it is impossible to sleep, you live with a lot of stress and you have little patience. It is necessary to find a viable solution. You need debt relief programs.
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8 options for debt relief
Option 1: Deferment
This relief option allows you to temporarily suspend debt payments. With the approval of the lender, it delays the repayment schedule without incurring penalties. It also avoids creating negative elements in your credit report that could lower your score.
During the postponement, interest is still accruing on your debt, except in specific circumstances. For example…
- If you have a subsidized federal student loan, the payment differs until you leave school and the government pays your interest.
- On the other hand, if your loans are not subsidized, the payments are deferred but interest accrues. This means that the amount you should increase as you go through school.
Option 2: Indulgence
This solution is similar to the postponement. The lender agrees to reduce or suspend the monthly payments completely. Periods of indulgence are usually shorter than periods of deferment. Forbearance is generally granted by a lender if the debtor communicates with him at the beginning of a period of financial difficulties. If you anticipate that you can not make your payments, you can request forbearance BEFORE payment default occurs.
Option 3: Refinancing
While deferment and forbearance change your payment schedule over a period, refinancing permanently changes your loan. The main objective is to reduce the interest rate applied to your debt. You can also provide other benefits in some circumstances, such as lower monthly payments.
The reduction of the interest rate applied to your debt allows you to save a lot of money during the term of your loan.
- You can refinance mortgages, car loans, and private student loans, qualifying for a new rate based on your credit score. When refinancing a mortgage, keep that in mind.
- For federal student loans, refinancing is available; however, the interest rate for federal loans is always based on a weighted percentage of the 10-year Treasury Note Index.
- If you lower the interest rate on a credit card, this is called negotiating the interest rate and not refinancing. Refinancing only applies to closed debts.
Option 4: Modification
Modifying a loan permanently changes the terms of that loan agreement. While refinancing reduces the interest rate, the modification can change the principal amount of the loan or the duration of the loan (the term changes). You can also change from an adjustable interest rate to a fixed rate. In most cases, you modify a loan to better suit your needs as a borrower and to achieve lower payments.
Option 5: Consolidation
Debt consolidation is the process of combining multiple debts into a single monthly payment and into a new loan or line of credit. Instead of worrying about multiple bills to pay, you only have to make one payment per month.
Consolidation is used to achieve one or more of the following objectives:
- Lower monthly payments
- Lower interest rates
- Simplified payment program
Debt consolidation is generally used for credit card debt and student loan debt. You must consolidate every single type of debt separately.
Option 6: reimbursement or re-payment plans
A repayment plan is used to permanently adjust the payment schedule of debt, but this does not modify the loan. Instead, the repayment or re-payment plan replaces the original loan repayment schedule. This is mainly observed with the federal debt of student loans and in the tax debt, with a specialized solution for credit card debt.
- The federal government offers payment plans that allow you to restructure the payment schedule of one or more of your student loans backed by the government. The fact that you can use a federal payment plan to adjust the multiple loan schedule makes this also similar to consolidation. The plans have an established term and help you achieve several objectives. You can get lower payments if you have a limited budget or accelerated payments to minimize interest charges.
- For the tax debt, an installment payment agreement pays one or more years of back taxes in a way that works for your budget.
Option 7: Settlement
Debt settlement is the most damaging option for your credit. In fact, when used correctly, none of the other options should negatively affect your credit score. At most, they will have a neutral effect on your credit; some can even improve their score.
This relief option can be used for credit card debt, tax debts, and private student loans. The federal student loan debt can not be liquidated (for the record, it is also extremely difficult to liquidate during bankruptcy). Mortgages are generally not settled; although they can be sold short, called “short sale” where you sell the house for less than the remaining balance of the mortgage.
Debt settlement requires careful negotiation since the initial natural reaction of most lenders would be to say no.
- The Internal Revenue Service (IRS) rarely exempts taxes unless it can be shown that there is no reasonable way to collect the full amount.
- Private student loans can be liquidated, but they can not be easily written off during bankruptcy. This means that the lenders have little incentive for liquidation.
- For credit cards, your debt usually has to be in third-party collections before settlement becomes a viable option.
Option 8: Forgiveness
The forgiveness of the loan (also called debt forgiveness) means that your debt will be settled without fines. It is a complete download that does not require you to make a full or partial payment. If you meet the eligibility requirements for forgiveness, any remaining balance of the debt is forgiven without penalty.
As you can imagine, this is quite rare. The most common type of forgiveness applies to federal student loan debt. But you must be in the military or in a position in the public services sector, such as nursing or teaching, to qualify.