How to Legally Eliminate Consumer Debt
People often ask how to legally eliminate debt. Aside from some very basic techniques, there are no magic wands to wave to make the debt disappear in an instant. But I wanted to review some of the easiest ways t eliminate your debt to imporve you debt ratio and make you credit look better, legally.
Free Credit Report
The first step towards making your credit look better is to figure out what your credit looks like now. It may be possible to get a free copy of your credit report online. What you are looking for is to get your hands on a consolidated credit report and monitor your progress as it improves online. Equifax offers a Gold 3-1 service that will work just fine for you.
Unless you monitor your credit report you’ll never know how far you’ve come. And while you are at it, when you order your credit report also order your credit score. The gold standard in credit scores is the FICO score. And while other credit scoring models exist, the FICO score is the most widely used and recognized. The FICO site also gives you great modeling tools to see how specific changes to your financial situation will help or hurt you.
Once you order your credit score, see where you score ranks in comparison to other people.
Debt Settlement
Settling your debts can be both a wonderful tool and a horrible experience. I would suggest that you work with a professional group that can help you to do it right.
The problems with debt settlement occur when consumers try to settle their debt when they are current on their bills. If you are current, creditors generally don’t reduce or settle your debt for less than you owe as long as you are demonstrating that you can make the payment. In this case your actions speak louder than your words.
But to fall behind on your bills to access a better debt settlement means that you are going to trash your credit, probably go into debt collection and increase your stress levels. This is where most consumers get upset, they fail to understand all of this when they sign-up for a debt settlement program and then act surprised when the collection calls and bad credit come calling.
If you have cash available, and you are already behind on your bills, a lump-sum debt settlement may be a good option to try. Again, use the services of a professional debt settlement company to make sure you are really getting the best deal. Otherwise, how would you know?
The debt settlement company will typically settle the debt for 60% of what you owe. But be aware, settling your debts can create a tax liability that you’ll have to pay at the end of the year. Again, this is why working with a professional debt settlement company is the way to go.
Debt Consolidation Loan
You really can’t borrow your way out of debt, but you can rearrange the debt to lower your monthly payment. But by doing this what typically happens is the debt is extended out for a longer period of repayment the the end result is that the total amount you will repay in interest will be much higher.
The best debt consolidation loans are typically only available to people who own a home and have sufficient equity in their home to borrow against. When you do this you are really converting unsecured credit into a debt consolidation loan that is now secured with your home. If, for some reason, you were unable to make your monthly payment, instead of just getting a collection from a debt collector, you might find yourself facing eviction and foreclosure.
The small minority of unsecured debt consolidation loans actually work out or are beneficial. Most unsecured debt consolidation loans are a scam and charge high fees, even higher interest rates, and you never get approved for them. These same concerns are the ones expressed by people about payday loans. But as long as you, the consumer, are aware of what the costs are for a debt consolidation loan or a payday loan, you are adult enough to make your own choice if this is a smart move for you.
Debt Consolidation - Consumer Credit Counseling
A credit counseling program does not negotiate with your creditors to develop a program to get you out of debt. The credit counseling program simply looks at who you owe, applies the formulas the creditors give them and create a debt management plan where you make one payment to the credit counseling group and they then carve up the payment and send your creditors their little piece of the pie.
Bankruptcy
You can legally file bankruptcy to get out of debt. A bankruptcy lawyer that is licensed in your state can help you to better understand what going bankrupt is all about and how it will impact you. Even if you don’t think you want to file bankruptcy, you should still find a local bankruptcy lawyer and have a conversation with them so you can be better informed about all of your get out of debt options.
It would be a mistake to pre-judge that you won’t consider going bankrupt unless you understand more about what it will mean to you in your situation if you file bankruptcy.
Cash Out Assets or 401K or IRA Accounts
If you have cash in savings to use to pay off your debt, that might be a smart thing to do and it’s legal as well. Where people make stupid mistakes is when they borrow from their retirement accounts. The argument is that the loan only charges 5% to repay but in fact the loan costs the interest charged plus any amount your investments would have made if you left the funds in.
If you borrow money from your 401k or IRA then you may also have to pay a tax penalty. You should get good tax advice and understand how much this will cost you in penalties and taxes before you do this. You don’t want to be surprised with a huge tax bill.
Borrow Money
You can always borrow money from friends or family to get out of debt but no matter what people say, borrowing money from personal friends and family can change the dynamic of the relationship. And if for some reason you can’t repay your loan, you will be financially harming people that you love and care about. Not cool.
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