You needed a loan, badly. Maybe you had a severe injury or condition and had to pay medical fees. Or you needed a car to get you to and from your new job. Or you and your partner needed to get a bigger place because you had a baby on the way. At first, you were confident about your finances. The loan was just a helping hand and you’d be able to pay it back in full soon enough.
But then you lose your job. Or some other emergency comes up that drains the rest of your finances. Or you get into an accident and a brutal combination of the two takes its toll. Maybe the loan was more complex than you originally thought. Whatever it is, you find you can’t keep making repayments. And when that happens, you just end up owing more and more. Interest rate increases and your credit score decreases. Late fees crawl out of the woodwork. You’re trapped.
Not how you pictured it, right? Now you’re more stressed and in more financial worry than ever. And maybe it seems like there isn’t a way out. Because what you really need right now is a loan, right? But surely you can’t do that, right? Well, there are actually ways you can deal with this situation and ease the burden. Be wary, though, that there is no perfect solution.
Settling your debt
Debt settlement allows you to reduce the amount of money that you owe. This will leave you more likely to be able to pay back an adequate amount and help you get your footing back. You’ll either be negotiating with the creditor or with a collection agency.
So, what are the problems with this? Basically, whatever you do, there’s no way of avoiding the simple fact that got you into this position. You asked an institute to lend you some money, and you were unable to pay that money back. Your credit score is going to take a hit. One positive is that effect may not be as bad in the long-term as it would be if you’d just continued paying nothing back. But settling your debt is the solid acknowledgement to all involved parties that you were unable to pay back the loan. This will make it much more difficult to get a loan in the (hopefully unlikely) event that you need to take one out in future.
Another problem is more of a personal, moral one. Many would consider not paying back what you owe the equivalent of stealing. You may want to brush to one side, however. Assuming you’re in a pretty desperate situation, you can be given some leeway when it comes to what people would consider morally grey areas. You also need to keep in mind that the system is built to offer loans, often unrealistic ones, then offer escape routes or flexible payment plans. This debt forgiveness may still net the creditors or collection agencies some profit. Just consider it part of the system you entered when you took out the debt in the first place.
The entire process is one of negotiation. Eventually, the creditor will contact you directly to discuss the loan. You may want an independent professional there when this happens; someone who has your back. This is where you will negotiate what you’re able to pay. The first thing they will request is the entire amount due in one payment. This is standard procedure; they will generally understand that this isn’t a possibility, and will move forward. Throughout the entire process, you must be upfront about your inability to pay back the full amount.
It is, perhaps, best to look at the last resort before we go any further. You should be informed of the extreme option, as it may very well be what you need to weigh your other options against.
You’ll no doubt have heard of bankruptcy. Some people think that it’s just a state someone finds themselves in when they’ve run out of money. Bankruptcy is, in fact, a court order that you can apply for if you’re in overwhelming debt. When you declare bankruptcy, the court will take charge of your assets and use them to take care of your creditors and your debt. In some extreme cases, the party you owe money to may apply to make you declare bankruptcy.
So it doesn’t really sound like there are any advantages with bankruptcy. But remember all those news stories you read about various celebrities declaring bankruptcy. Though ‘bankruptcy’ suggests having no money at all, this isn’t actually the case. You will be left enough money to live on, and there are certain items that won’t be taken from you by the court. It also gets the creditors off your back: they are prevented from contacting you or taking court action against you. The money you owe is often written off and, once the whole thing is over, you can make a fresh start.
That sounds almost enough to make it the first resort, right? Well, there’s a slew of disadvantages. Declaring bankruptcy will cost you a lot, possibly into the four-figures. Fines, fees and debt you accumulate during the process will not be written off. Your bank accounts and all your cards will be closed. If you own any businesses, they will be closed. This will, naturally, also result in the dismissal of your employees. Hopefully, this has communicated to you the need to make this your last resort. You can read more about bankruptcy at http://www.uscourts.gov/.
In the UK: smaller loans and low income
If you live in the UK, there is a smaller-scale option you can take. Another thing you need to consider early on is whether or not you qualify for a Debt Relief Order. If you have a low income and owe less than £15,000, you may qualify. A Debt Relief Order will get you a period where you don’t have to make any payments to the creditor. This period is usually about a year. For smaller loans in the UK, it’s worth exploration.
Debt consolidation is the route one may take if they owe several creditors instead of just one. Owing to several parties comes with its own unique pressures. Let’s say one person owes $10,000 to a single creditor. That’s a big amount in itself, but is accompanied by one interest rate, one set of fee, etc. If someone owes $2,000 to every one of, say, five creditors, that’s different. The base loan is the same amount, but it comes with several interest rates and even more fees.
To consolidate means to unite separate things into one cohesive whole. And that’s what debt consolidation does. A debt consolidation company will purchase the debts from the creditors. They will then combine them into a single debt, which you then owe to them.
Getting professional advice
Whatever route you take, your credit score is going to be affected. Debt settlement or consolidation is a complicated process with long-term consequences. Sites like http://www.bestdebtconsolidationloans.org/ can offer you professional advice. Some may even be able to begin the process with you and guide you all of the way. This will generally cost you, but it may be worth it.
They can analyze your current debt situation and give you invaluable help. There’s a lot of different ways to go about settlement or consolidation, and if you don’t stay on your toes you may end up in more trouble that you were at the start of the process.
Did you say “purchase debts”?
What you should understand about this process is something we implied earlier. Loans and debts are a profitable business. Most people do pay back their debts eventually and the interest rates keep profits high. So for one company to take debt from another isn’t so much the transferring of a burden as much as it is the transferring of a useful item.
As for the original creditors, why would they allow this? Why don’t they just hold tight and wait for bigger payoffs from the person in debt to them? It’s simple. In these extreme circumstances, they understand that the person in debt is either not going to pay them back or will be unable to for a long time. In this circumstance, selling the debt to another company ensures that they get some money out of the deal. And some money is better than no money – a concept we’re sure you’re familiar with, given the circumstances. It’s simply a case of a company cutting their losses after an unsuccessful business decision. http://www.neweconomics.org/ has more information regarding this structure.
The important thing to take away from this article is that there are things you can do to get yourself unstuck. In general, creditors and collection agencies are pragmatic. They will know whether or not you purposefully attempted to steal money from them, and will act accordingly. They will work with you to get the best deal for themselves, but this doesn’t mean it will work against you. The situation is ugly, and you will not come away unscathed; you will be seen as a liability to any future creditors. But you don’t have to be alone, and you can get yourself back on stable ground.