Lose your debts in a way that works for you.
8 Ways to Break Free of Debt — From Easiest to Hardest
Debt can creep its way into every thought of your day — until you free yourself from the chains that bind you.
Here are eight proven debt relief solutions, ranked from the easiest to hardest. Scroll through to see which solution fits best for you and your financial situation. Once you know your options, you can lose your debts in a way that works for you.
Learn about debt relief programs for every type of debt.
This debt relief program is among the easiest to qualify for because it's a temporary solution for financial hardship, such as medical expenses or losing your job. Interest almost always adds up while you're not making payments.
No matter what the situation is, you must be approved by your lender before you can stop payments. There is usually a formal request process that includes documentation of your hardship. You're still responsible for repayment until then, and if you miss payments you still risk your loan becoming delinquent and defaulting.
It's more common to see this type of debt relief used among student loan borrowers and on mortgages. But it can sometimes be used on other kinds of debts, including credit cards.
If you expect you will need this type of debt relief, you should contact your lender before you fall behind on payments.
This debt relief option seems a lot like forbearance, but when it comes to student loans there is a distinction: You may also be able to get a break on your interest with deferment.
Like forbearance, deferment allows you to put your repayments on hold without taking penalties or negative marks on your credit. But if you have subsidized federal student loans in deferment, the government covers the interest too. That means the balance won't be higher when you become ready to start paying it.
If your loans are unsubsidized, no such luck. Even in deferment, interest charges will accrue just like in forbearance.
The previous two options may alter your loan for a fixed amount of time, giving you an opportunity to get your finances in order. But this option will completely replace your old loan.
The goal of refinancing a loan is usually to lower your interest rate, although you may also be able to lower your monthly payment. Refinancing can work with mortgages, car loans, and even private student loans. Your new rate will be determined by your current credit score.
You're also able to refinance federal loans, but it's important to note that the interest rate on federal loans is based on a weighted percentage of the 10-year Treasury Note index. There isn't much you can do to influence that, unlike your own credit score.
You also may be able to alter the interest rate on your credit cards, but that process is simply called interest rate negotiation, not refinancing.
4. Repayment plans
This is a way to permanently change your debt repayment schedule. It will in no way modify your loan's terms, but affects when you pay it back.
Repayment plans are commonly used on federal student loans and tax debt, although there is one specialized solution for credit card debt.
You're able to restructure your payment plans on multiple federal student loans at once, and there are different plans to help people in different situations. Some borrowers need help lowering their payments to better meet their budget, while others want to speed up their payments to lower their interest charges.
If you're dealing with tax debt, you can set up an installment agreement. This allows you to repay back taxes in a way that fits your budget.
For credit card debt, if you're denied consolidation (see the next slide), you can contact a credit counseling agency to set up a debt management program. It's similar to consolidation in the way the agency designs a repayment schedule between you and your creditors, and simplifies repayment — but you're not taking out a loan through the counseling agency. You still owe your creditors the individual debts.
Debt consolidation is a process where you take existing debts and mash them all together in one payment through a new loan or line of credit. Rather than having to keep track of multiple monthly payments, you only need to focus on the one more manageable payment.
This type of debt relief can help borrowers lower their monthly payment, or interest rate, and can simplify their repayments. It is common to see debt consolidation used for credit card bills and student loans.
Each type of debt must be consolidated separately.
With credit cards, you also have the option of a balance transfer. In this scenario, you transfer other credit card debt to a new balance transfer credit card with an interest-free grace period. It's important to pay off the balance before the introductory 0 percent annual percentage interest rate ends, or you'll be right back where you started.
This is the one debt relief option that, even if used correctly, will harm your credit score. All other options mentioned up to this point, if executed properly, will only improve your score or leave it largely untouched.
This option allows you to settle your debts for a lower amount than you owe, which is why it harms your credit score. No lender is going to let you get off the hook that easily — they want it known you didn't pay what you borrowed.
This is also a difficult relief option to navigate. While technically available for credit card debt, tax debt, and private student loans, most lenders are likely to say no unless there is no other way to collect all that you owe. Credit card is the easiest to settle, but only once the account has already gone to a third-party collector — at which point your credit has already suffered a hit.
Learn more about what kinds of debt can be settled.
Like refinancing, this will permanently change your lending agreement. The difference between the two is significant, though.
Refinancing is often used to reduce the interest you pay on your loan, whereas modifying can alter the principal you owe or the length of time you have on the loan. With this kind of debt relief, you're also able to switch from an adjustable interest rate, which can go up or down from time to time, to a fixed interest rate.
The most common type of loan modification is for a mortgage. This type of debt relief was much more common a decade ago, after the mortgage crisis of 2008. The Home Affordable Modification Program, a federally funded program designed to throw a lifeline to borrowers who owed more than their homes were worth, ended in January 2017. New modifications are much rarer today.
There's a reason we said we're ranking these options from easiest to hardest — this one is tough to qualify for.
Loan forgiveness is when your debt is wiped clean without any penalties. This type of debt relief is most commonly used among federal student loan borrowers. But to qualify, you must work in the public sector, like nursing, firefighting, teaching, or military service.
There is also forgiveness for tax debt in narrow circumstances. This is granted to an "Innocent Spouse," for instance. To attain this status you must be able to prove that your spouse brought tax debt into the marriage without your knowledge.
For the most part, the difficulty of debt relief options fits with what you get out of them. But by knowing all your options, you can find the best way to get your debt and budget under control.
This article was originally published on Debt.com.
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Article last modified on July 13, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: 8 Ways to Break Free of Debt — From Easiest to Hardest - AMP.