What Are Your Debt Relief Options?


Illustration for article titled What Are Your Debt Relief Options?
Photo: Damir Khabirov (Shutterstock)

A new month means new bills, and millions of Americans’ finances are well past the breaking point as they grapple with the pandemic. If you can’t pay your debt or are worried about losing your house or car, it’s time to consider these options: credit counseling, hardship relief, a debt management plan, or bankruptcy.

Start with credit counseling 

There’s no one-size-fits-all solution to debt relief, as each option depends on your specific financial situation—but regardless of what you choose, start with credit counseling. Why? A qualified, non-profit credit counseling agency will give you free debt analysis. And by law, they must serve your best interests and recommend a debt solution that works for you, not them.

Update your budget 

Creating a new budget is both a first step and possible solution for taming your debt. If you’re fortunate, your financial problems can be resolved by maintaining a budget that accurately lists your income and expenses. This process will help you identify and eliminate unnecessary expenses that could be the difference in paying loan repayments on time.

As part of this process you will prioritize your debts based on the value of something you need (a secured asset like a car or home), the cost, and the damage to your credit—giving you a clearer picture of your finances.

Claim hardship relief

To help with expenses, many lenders offer COVID-related financial hardship plans in which they are willing—and in some cases required—to provide loan extensions, reduced interest rates, and deferred repayments. In exchange, these programs might require you to:

  • Prove your hardship with documentation.
  • Freeze or close your credit card account.
  • Meet with a credit counsellor.
  • Complete a debt management program.
  • Set up automatic withdrawals from your bank account.
  • Lower your credit limit.

Enroll in a debt management plan 

Your credit counsellor might recommend a debt management plan (DMP), which allows a separate company to work with creditors on your behalf to negotiate interest rates and new monthly payments. This can include the consolidation of multiple outstanding high-interest loans into a single personal loan at a lower interest rate, paid in fixed monthly installments, with a clear beginning and end to the loan.

With this arrangement, all parties agree on an affordable payment schedule that allows for three to five years to pay off your debt. DMPs make sense for people who have a stable income but need an affordable payment plan with lower interest rates on their credit card balances. The downside is that you temporarily lose access to credit and you have to consistently pay fixed monthly payments.

File for bankruptcy

Bankruptcy is a legal process that allows you to eliminate or repay some or all your debts under the protection of the federal bankruptcy court. There are two filings: Chapter 7 and Chapter 13 bankruptcy.

  • In a Chapter 7, your assets are liquidated to pay down debts, with the exception of exempt assets like your 401(k) or pension, household goods, and low-value car.
  • Chapter 13 bankruptcy allows consumers to keep more of their assets, including a home, if they successfully complete a court-ordered plan to repay their debt.

The biggest advantage of bankruptcy is discharging most of your debt, with some exceptions (child support, court fees, alimony, recent tax debts, and most student loans can’t be discharged through Chapter 7 bankruptcy). The downside is considerable, which is why it’s usually a last resort—you could lose your house, cars, cash, and savings. Filing for bankruptcy also affects your credit history for 10 years, making it difficult to secure loans or qualify for lower interest rates. Also, the final kicker: filing for bankruptcy isn’t cheap.

Before you make any decision, talk with your credit counsellor, as they will need to analyze your full financial picture before making any recommendations about your options.