When you are caught in a debt spiral, and it gets hard to handle persistent calls from the creditors, you might be willing to consider the prospect of debt settlement.
But debt settlement will not free you of tax implications on the canceled debt, will adversely affect your credit score, and you may end up paying a high fees to a debt settlement agency.
Consider these six alternatives to debt settlement before you make a decision.
Create a new payment strategy
If you are willing to consider the ideal option of paying the debts in full, it will have solid benefits for your financial future.
Rework your budget to see whether you can cut some monthly expenses to make the minimum monthly payments until your financial situation improves.
Look at the option of taking up an additional part-time job or a freelance project that can generate some cash to repay the debts.
Discuss with your creditors
Be upfront with your creditors and explain to them your current financial situation to see if they can be flexible with the payments or accept repayments over a longer time period with a smaller monthly payout.
In case of credit card debt, find out if the company has a borrower hardship program with easier terms.
Many creditors will have an open mind to rework the payment plan when they see your true financial situation and your commitment to repay.
Approach a credit counselor
Nonprofit or for-profit credit counseling agencies are often able to assist people that are struggling to repay debt.
They may charge a fee, but will offer you prudent suggestions or strategies to handle your financial situation.
They can guide you how to prioritize debt repayments, how to plan a new budget, what debt relief options you may explore, and give you tips on programs such as student loan forbearance, if you qualify for them.
A credit counselor may even negotiate with the creditors on your behalf.
Start a debt management plan
With help from an experienced credit counselor, you could explore the possibility of a debt management plan (DMP).
This is a legally binding agreement to repay your full debt with a specified time period. DMPs are usually a workable solution for unsecured debts like medical bills and credit card debt.
The DMP will lower your interest and other debt-related costs, but it won’t bring down the principal debt amount to be repaid.
Debt consolidation strategy
A debt consolidation strategy may work in situation where you are juggling between multiple high-interest loans.
A debt consolidation plan will roll multiple debts into just one loan with a relatively lower interest burden.
Debt consolidation loans are typically fixed rate loans to be repaid over a longer time period. Unsecured personal loans, credit card debt, and medical bills can be paid off with a debt consolidation loan.
Choose a balance transfer
When you are reeling under the burden of a high-interest credit card debt, you may consider the balance transfer strategy to move the balance to a low interest card.
If you have a good credit score, you may try to obtain a 0% balance transfer card.
One of the key elements to consider with a 0% card is the balance transfer fee, which could range between 3% and 5%. Make sure that the fee cost does not exceed the amount of interest cost you would be saving by transferring the balance.