So you’re broke and looking for debt relief. Any relief. If there’s help for your mortgage, you’ll take it. If somebody were to offer you advice on how to shrink your car loan, you’d grab it. And you’re really regretting all of the credit card debt you’ve accumulated.
Granted, you can always declare bankruptcy. It won’t be pretty, and your credit score and credit report will be in tatters for years to come. It exists for a reason — to wipe the slate clean and give a fresh start to people who need it. But it’s often a last solution.
If you’re behind on payments, here are some debt relief strategies you can try, based on different financial situations. Ask your lender if any of these can work for you, or if they have other suggestions.
[Read: Secured vs. Unsecured Debt.]
If You’re Behind on House Payments
This is probably the scariest type of debt to be behind on since nobody wants to lose their home. If you’re behind on this type of secured debt, you want to fix your problem as fast as you can.
Some common debt relief strategies that home lenders often offer borrowers include:
Forbearance. This is a payment plan that allows you to lower or eliminate mortgage payments for a period of time, such as several months and sometimes for as long as a year. That certainly sounds great, but interest will still collect on your loans, and eventually you will have to make the payments. Some lenders will allow you to put the missing payments at the end of the loan, but as you can imagine, how you make up the payments needs to be worked out before you do the paperwork for a forbearance. You don’t want to make things worse.
A loan modification. This is similar to refinancing your mortgage. If your lender agrees, you’ll get a new loan, where the payments are smaller, and you may have a lower interest rate. That sounds great, and it is, but the loan will likely stretch out for many more years. So unless things are dire right now, someday, you may regret having done this.
Principal reduction. If you have a loan through the government-sponsored Fannie Mae or Freddie Mac, you may be able to get the principal on your loan reduced, which would mean you’d owe less on your loan, and so your monthly payments would be reduced. If your loan isn’t through Fannie Mae or Freddie Mac, you may be able to get a principal reduction through the Home Affordable Modification Program, also known as HAMP.
[Read: 10 Easy Ways to Pay Off Debt.]
If You’re Behind on Car Payments
This is another form of secured debt that you don’t want to be behind on. As with your home, call your lender when you know things aren’t looking good, rather than waiting until, say, your car is being repossessed and towed from your driveway. You may be able to save a lot of stress (and some money, like late fees) if you work things out before your finances implode.
Loan deferment. This is what most car finance companies will offer if you’re behind. Generally, you’ll be allowed to miss a payment or two, or you may be asked to pay the interest rather than the principal — and the payments are simply extended to the end of the loan.
However the details of the deferment work out, you will pay more in interest.
Refinancing. If your credit is still pretty good, you may want to look into refinancing the car loan to get a lower interest rate and a better monthly payment. But read the fine print for refinancing fees and the additional interest you’ll shell out over the life of the loan.
If You’re Behind on Credit Card Payments
Being behind on your payments and accruing revolving debt is the last thing you want. Some strategies you may want to consider include the following.
Contact a credit counseling agency. These are nonprofits that offer debt management programs. You’re still paying off your credit cards — and you might include other loans, like student loans — with a credit counseling agency, and you’ll likely pay the full amount you owe, too. But your interest rate will likely be lowered, and because your lenders are working with the agency, the phone calls for missed payments will stop.
Obviously, you have to make payments now to the credit counseling agency, but it’s generally a lot easier working with one nonprofit that is looking to help you versus struggling with multiple creditors. But there are shady outfits out there, which will promise to help you with credit card payments and just really want your money, so make sure your agency is accredited by the National Foundation for Credit Counseling.
Debt settlement program. Look at debt settlement companies with a healthy dose of skepticism. Some companies, for instance, will recommend that you stop making payments. You then go into default, and then they negotiate a new payment plan for you. But that will thrash your credit score.
Moreover, some debt settlement programs charge upfront fees, and what if they can’t negotiate a better payment for you? In most cases, it’s probably better to either try negotiating a payment plan on your own or use a credit counseling agency.
Ask for a hardship program. As in, call your credit card company and make the request.
Hardship programs don’t last as long as a debt management plan but can provide some savings without significant harm to credit ratings, according to Michael Sullivan, a personal financial consultant with Take Charge America, a Phoenix-based nonprofit credit counseling and financial education agency.
Sullivan advises sharing with the credit card company that you can’t make full payments and offering reassurances that you will be able to make regular payments again. You should be able to work out a payment plan, he says.
But Sullivan cautions, “Be prepared for the creditor to freeze the account. They may not want balances increasing when there is no cash coming in. This can put some consumers in a bind since many people have no savings and live on credit when there is an income interruption.”
Try transferring your debt to another credit card. This only works if you still have excellent credit. You could look into applying for a balance transfer credit card that offers a 0% introductory annual percentage rate. If you get one that allows you to transfer your debt for 12 or more months, you won’t have interest collecting for that period — and that may give you enough time to pay off the debt without it spiraling out of control.
That said, look at the fine print. There will likely be a balance transfer fee, maybe 3% to 5% of the money you’re going to transfer.
A debt consolidation loan. Online lenders, banks and credit unions are some sources that might offer a debt consolidation loan. Ideally, you’ll find a loan that offers direct payments — that is, the lender will pay off your old debts, and you’ll pay the new lender a lower interest rate than what you were paying your other creditors. If you can’t find a debt consolidation loan that has a lower interest rate, obviously, don’t apply for it.
Less ideal is a loan that does not make direct payments. What you don’t want to do is use the money for something else — and then find that you have your old debt, plus the debt from this new lender.
If You’re Behind on Any Debt, Getting Out Starts With You
The companies you owe money to aren’t mind readers. They won’t volunteer to give you debt relief.
Remember that you have to ask for it, says Karen Ford, a financial coach in Morgantown, West Virginia.
“I know that sounds obvious, but you would be surprised how many people don’t ask. The worst-case scenario is that they tell you no,” Ford says.
She cites a client she coached who wrote a lender to request debt relief on $85,000 in student loans.
“She received a letter in the mail several weeks later that announced that they had written off $35,000 of it,” Ford says. “Ask not, get not.”
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