There are few things in life that are more overwhelming than being in serious debt. Whether your debt is due to circumstances outside of your control – such as a job loss or medical bills – or bad financial decisions in the past, the end result is the same. And if you’re currently drowning in significant personal debt, you might be wondering what your options are to climb your way out.
Depending on your own unique situation, there are a few different approaches you can take to get out of debt once and for all. There are pros and cons to each of these debt relief options, so it’s important to be honest with yourself before deciding.
You’ll need to sit down and evaluate just how much debt you’re in, what kind of debt you carry, and the lifestyle changes you could make to help your cause. Then, you can decide which of the following debt approaches works best for you.
Here are the five options you have to choose from if you’re buried in personal debt, and why you would want to opt for each.
Tackle Debt Head-On
Personal debt can be overwhelming, especially if you are walking around with significant balances. Your debt may involve personal or student loans, credit card balances, auto loans, or a mortgage — or all of the above. No matter the debt composition, though, the best way to tackle it (if at all possible) is to hit your repayment head-on.
This might mean finding ways to free up your cash flow each month. You could do this either by reducing your household expenses, cutting your spending, or picking up a side hustle to bring in extra income… or all of the above. Then, you can direct those extra funds toward your debt repayment and slowly begin to chip away at the balances.
Even if you are carrying a substantial amount of debt, an aggressive repayment approach can still be the answer. You can also utilize 0% APR balance transfer credit cards to reduce your monthly interest, or even apply a method such as the debt snowball or debt avalanche to shorten your repayment length.
Doubling down on your efforts and simply trudging through may seem like an arduous method, especially if your balances seem impossible to tackle. However, it is the overall best way to overcome what you owe while also working to break the cycle of debt.
If you have an overwhelming amount of unsecured debt (i.e.: credit cards) that will take more than 5 years to pay off, you might want to consider another method, though. Also, if you have cut your expenses down to the bone and are still struggling, or are unable, to make your monthly payments, it may be time for more drastic measures.
Think About Debt Consolidation
If you owe on a number of different accounts, such as various loans and credit cards with varying interest rates and balances, debt consolidation might be the route for you. It will not only simplify your debt management, but it could also save you some time and money on the repayment in the long run.
By consolidating your debt, often by route of a personal loan, you have the chance to lock in a lower interest rate than you are currently paying. Credit cards have an average APR of about 16%, though this can go up to as much as 30% or beyond. This is especially true if you’ve missed payments in the past and are paying a penalty APR.
Personal loans, by contrast, have an average interest rate of about 13-15% for those with good credit (a credit score between 680 and 719). Depending on where you apply for your loan and how much you need to take out, you have the opportunity to lock in a rate even lower. And if you’re consolidating credit card balances that currently charge interest in the 20s and 30s, this will save you a ton of money.
It will also make your debt repayment process simpler. Rather than keeping track of multiple accounts and payment due dates, you will only have to track one loan with one monthly payment. If you’ve struggled to keep it all straight in the past — or even missed payment dates as a result — a debt consolidation loan can really simplify your finances.
Of course, there are plenty of pros and cons when it comes to debt consolidation. Depending on the loan terms you choose, you could wind up extending your debt repayment, taking you even longer to get out of debt. It could also impact your credit, due to a large new loan being added to your credit report along with the hard inquiries involved.
Lastly, if you’re not disciplined, it’s very easy to wind up racking up even more debt on your now-paid-off credit card accounts.
Debt consolidation has many perks, but it takes quite a bit of discipline to navigate successfully. Carefully weigh the pros and cons, and be honest with yourself about your level of discipline before you proceed.
Consider Debt Management
If you are dealing with a hardship or simply having trouble paying off your accounts, it may be time to negotiate a debt management plan. This type of plan won’t shave anything off of your balance owed (and may wind up costing you more in the end), but it will help you ensure that you don’t default on your debt.
Debt management plans come in the form of credit card and loan hardship programs, as well as debt management agencies. Both can help you get a leg up if you are really struggling to gain any traction on your debt repayment, but they don’t come without their own downsides.
With credit card hardship programs, you will call up your credit card lender to explain your current hardship or situation. Let them know that you have done everything in your power to tackle your balance but are struggling, or unable, to make your payments each month. You can request a hardship arrangement, which will allow you to repay the balance owed at an often-reduced interest rate.
These payment plans are not advertised and typically also include your credit card account being closed. You will not be able to charge anything new on the account, so keep than in mind before you call in with your request. However, if you are truly drowning in your debt, this can be a way to get a grasp on the payments and even reduce the interest you’ll have to pay in the end.
Debt management agencies work much in the same way, but the process is a bit more aggressive.
When you contact a debt management agency, they will evaluate your financial situation thoroughly. They will then present you with a few different solutions for overcoming your debt, one of which will be management of your unsecured debts — secured debt such as student loans, auto loans, and mortgages are not included. If you choose to go the management route, you will often pay an enrollment fee in order to work with the agency, as well as a monthly fee.
The debt management agency will contact your lenders on your behalf and let them know that you are enrolled in a program. They may be able to negotiate reduced interest rates or manageable repayment plans on your behalf, and you will usually be required (or forced) to close your credit card accounts afterward (very similar to the hardship programs above).
While your debt is being managed by an agency, you should expect to live without credit-based products. Opening any new accounts could prompt the agency to withdraw their agreements with your lenders, and leave you to deal with the mess yourself.
Look Into Debt Settlement
The concept of debt settlement, at first glance, sounds very appealing. After all, who wouldn’t want to reduce the amount they owe?
Unfortunately, debt settlement isn’t quite as glamorous as it may appear. Not only can it be incredibly impactful on your credit, but you could wind up still paying just as much in fees, taxes, and potential legal action in the end. It’s almost always better to either consolidate the debt or simply declare bankruptcy, rather than play the risky game of debt settlement.
There is no shortage of debt settlement agencies out there, promising to reduce the amount you owe creditors to a fraction of your current balances. What they don’t tell you, though, is that you will need to essentially challenge your lenders for months before you actually complete the settlement process. And even then, nothing is guaranteed.
When you begin working with a debt settlement company, they will tell you to stop sending in your monthly payments. Doing so, of course, will cause you to default on your debts, resulting in late fees, penalty interest rates, and accounts being sent to collections. During this time, the agency will being negotiations for settlement of the debt, but the process can take months (rarely less than 4-6 months, if not years).
All the while, your creditors can — and often will — report your payments as late to the credit agencies as well as report any accounts you have in collections. This will further damage your credit, and those negative reports will follow you for at least seven years… even if you are successful in your settlement attempts! You may even have legal action taken against you, which could result in property liens or wage garnishment.
Even if you do wind up settling your debt for a fraction of what you owe, you’re not in the clear just yet. Come springtime the IRS will be calling, and you will typically owe taxes on the forgiven amount.
If you are thinking about debt settlement as a solution to your money troubles, you may just want to consider bankruptcy instead.
Debate the Impacts of Bankruptcy If You’re In Too Deep
The idea of having your debt erased has its appeal. But bankruptcy isn’t so simple, and you certainly shouldn’t go into the process taking it lightly. It’s a very serious financial decision that can follow you for the next decade, so be sure that you’ve exhausted all other options first.
You may want to consult with a bankruptcy attorney (in Canada, this is called an insolvency trustee) to see whether your debt and income levels qualify for bankruptcy. They will go over your options for you, as well as lay out which accounts would be eliminated by a bankruptcy filing. For instance, back taxes and student loans usually aren’t forgiven. Also, if you have a co-signer on any of your accounts when you file for bankruptcy, he or she will automatically be responsible for the full balance due. So, there’s plenty to consider.
If you’ve decided to go through with the process and file for Chapter 7 or Chapter 13, you will see the impacts on your credit for up to 10 years. You will typically be forced to also give up things like a second vehicle, extra home, family heirlooms, etc., and debts can still pile up even after the fact. However, if you’re already struggling to make payments and destroying your credit in the process, filing for bankruptcy can actually allow you to move past and begin healing your credit even faster.
No matter why you would up in debt or how much you owe, the end result is the same. Being in debt is absolutely overwhelming, especially if you are struggling to stay above water (let alone get ahead).
Tackling your debt is important, both to transform your finances and improve your credit situation. For some, this might be possible just by adopting an aggressive budgeting approach and throwing all of their effort at debt repayment. It might mean taking on a debt consolidation loan to simplify repayments and even reduce the interest charged each month. For others still, more impactful approaches such as debt settlement/management or even bankruptcy may be in order.
Before you decide which debt-tackling approach is right for you, sit down and weigh the options. You may also want to talk with a counselor, attorney, or trustee (you can find one here) to get a second opinion on your situation and its lasting impacts. Determine exactly how much you owe and where, gather all of your interest rates, and take a good hard look at your current monthly expenses. Then, decide which of these debt solutions will get you out of debt the soonest, for the least amount of money, and with the smallest negative impact on your credit.
Gordon Sands is an experienced financial writer, and president of Bankruptcycanada.com. Having worked alongside his father for over 8 years in the bankruptcy field, Gordon Sands has written numerous articles about debt relief and money management in hopes of helping readers take back control of their finances and lives.