by Lori Pollack, Executive Director
Financial Counseling Association of America (FCAA)
Being in debt can be overwhelming. As you start to think about the best ways to pay off your debt know there are options; there is hope.
How much debt do you have?
Are you able to make your monthly payments on time, or do you wind up paying late fees? Or have you fallen behind and stopped making payments altogether?
Private student loans?
Contact your lender for refinancing options.
Federal student loans?
Check with your servicer to learn about your options once repayments restart this May, 2022.
Mortgage problems? Can’t make your car payments?
Can your mortgage/car loan be refinanced?
Credit card debt, payday loans, medical debt and other unsecured debt?
Here, in no particular order are four options that folks typically look at for help with their debts:
Debt consolidation loans
These are personal loans used to repay one’s unsecured debts. You’ll make monthly payments until the loan is repaid. While interest rates are low, the rate you qualify for will be based upon your credit score and other lender specific requirements.
Nonprofit credit counseling
Besides helping you create a budget and offering free financial education, a nonprofit credit counseling agency can enroll you in a debt management plan (DMP), if you qualify. This is an individualized plan created to help you repay your unsecured credit card debts in full (in monthly installments over a five year period). There are no tax liabilities but there could be fees paid to the credit counseling agency (which are typically low and regulated by states that regulate credit counseling).
Balance transfer credit cards
These cards could be a great way to “borrow” money at low interest rates for a specific period of time. The rate charged on these credit cards will likely depend upon one’s credit score. There may also be a balance transfer fee. Know the terms of the balance transfer before taking advantage of this option.
A plan whereby you negotiate with your creditor(s) to repay a percentage of your outstanding debt. You can do this yourself or you can enlist the help of a debt settlement company. Know that whether you do this on your own or with help, you may incur a tax liability on the portion of your debt that was forgiven. Unlike with a DMP, entering into a debt settlement plan will harm one’s credit score as payments to creditors stop while consumers save to make the “settlement offer.” As for fees, although regulated, fees these companies charge are typically higher than those charged by credit counseling agencies and are either a percentage of the amount of debt enrolled in a plan or a percentage of the amount of debt saved. And if you opt to enlist help, NEVER pay fees upfront.
No matter what your situation or what you ultimately decide to do, the very best first step to paying off your debts is for you to construct a budget. Your budget is the best snapshot of your overall financial situation at a given point in time. A good budgeting tool is always useful. The Financial Counseling Association of America (FCAA) has a Debt Freedom Tool that is free of charge. After you’ve answered questions about your monthly income and expenses, the tool will analyze your responses and give solutions best suited to your particular situation. You get to decide what your next steps will be.
Hopefully your budget and the above suggestions will help guide you to making the wisest choices you can for yourself.