If You’re Already Behind, Debt Validation Could be a Good Option
Some creditors place borrowers into an agreement or contract that is invalid. Contract validation is a rapidly growing form of debt validation for unsecured debt (credit cards, store credit cards, etc.) and private student loans. Debt validation involves Identifying and addressing the invalid contract terms. It is not easy and takes years of experience.
- Finding an invalid contract drives near-term results
- Very favorable client outcomes (% of debt relief)
- Faster timeline to debt relief
- If the agreement/contract is found to be valid: there are no immediate benefits (debt savings)
- Other debt reduction strategies need to be pursued
Debt settlement is one of the more popular debt relief strategies available today. In a debt settlement program the enrollee makes monthly deposits into a trust account that is FDIC insured, held in the client’s name and is accessible by the client. As these funds accumulate the debt settlement firm negotiates debt reduction with creditors which are often significantly less than the balance owed. Each debt or account is systematically targeted until the client is debt free.
- Affordable monthly payment
- Significant savings in the mid-term
- Mich faster than a minimum payment approach
- Some debt accounts may not qualify
- Client must be in financial hardship
- Creditor calls and possible lawsuits
Debt negotiation can improve your financial situation by working with your creditors to negotiate: (i) a lump sum payment to reduce your account balances, (ii) reducing your interest rate, (iii) reducing the term (time to pay off) of your loan or payment plan. This approach is typically better suited for unsecured debt such as personal loans, student loans or business loans.
- Reduced monthly payment
- Significant long-term savings
- Reduce interest payments
- Lump sum requires savings or other options
- Not applicable for all types of debt
- Not a viable solution for all creditors
If you’re a homeowner, a cash-out refinance could be a great tool to help you pay off unsecured debt and combine your bills into one monthly payment.
This option is best for homeowners who have a reliable income, good credit, and sufficient equity in their home. Add your debt amount to the balance of the mortgage you are refinancing and you can take the extra cash and use it to pay off your creditors. You still have the debt to pay, but now it’s combined with your mortgage into one monthly payment.
This option could make sense for you if you have multiple high-interest credit cards because secured loans like a mortgage generally carry a lower interest rate. It also gives you the opportunity to refinance at a lower interest rate than your original mortgage. This is not a solution you can do by yourself. You will need to work with a lender, as with any other mortgage refinance. Once the mortgage is approved and financed, you can use the additional cash to pay your creditors.
While this can be an effective way to pay down your debt, there are a few risks to consider. Because this is a secured loan, it’s especially important to keep up with your monthly payments so you don’t you run the risk of losing your asset which in this case would be your home.
Also, keep in mind there are different costs involved with refinancing. Between home appraisals, closing costs and other fees, the total cost could be significant after all is said and done. That’s why it’s important to take your time and make sure the benefits outweigh the risks.
- High interest debts paid off
- Reduced monthly payments
- Tax-deductible interest payments
- Need to own a home
- Increased foreclosure risk
- Adds to mortgage debt
Credit counseling involves assisting financially distressed individuals by managing their debt through education programs and budgeting tools. Enrollees are often placed into Debt Management Plans that are managed by credit counseling agencies which distribute payments on the debtor’s behalf. Debt Management program participants do relinquish some financial control of their money. There may be fees depending on the services provided.
- Consolidates debt for one payment
- Can lower interest rate
- Does not reduce debt
- Potential loss of credit cards
Bankruptcy is arguably the most drastic of all the debt relief strategies available to consumers. The United States bankruptcy process effectively allows debtors to get a “fresh start” by legally declaring themselves unable to repay outstanding debts and liquidating some assets to satisfy creditors. Chapter 7 and 13 are the most common types of bankruptcy used by individuals, however, any form of bankruptcy will have a long-lasting derogatory effect on creditworthiness and must be approved by the court before the benefits materialize.
- Fastest strategy available
- Limits creditors actions
- Most debts can be discharged
- Long-lasting credit damage
- Loss of credit cards
- Liquidations of assets
A minimum payment strategy is the most conservative option available. When making minimum payments on debt a borrower is maximizing the profits of the creditor. A minimum payment strategy is only recommended as a temporary measure to get through a tough financial stretch because the total debt is reduced at a slow rate. Debtors who routinely find themselves making minimum payments should seek another debt relief option.
- No creditor calls
- Lower credit impact
- No late fees
- Long payoff time
- Highest interest payments
- No loan value reduction
DISCLAIMER: Read and understand the program before enrollment. The Financial Wellness Debt Relief (FWDR) program is unavailable in all states and fees may vary from state-to-state. We do not guarantee your debts will be resolved within a specific time or for a particular amount or percentage. However, negotiated settlements that we obtain will resolve the entire account, including all accrued fees and interest. Clients who end up making all of their monthly program deposits will pay approximately 65-75% of their original enrolled debts over 18 to 60 months. Not all clients are able to finish their program for various reasons, including an inability to save enough funds. Estimates are based on actual prior results, which will always vary depending on your specific circumstance, including your enrolled creditors and program terms. Using debt relief services will likely adversely affect your credit, may subject you to collections or lawsuits by creditors or collectors, and may increase the overall balances of your enrolled accounts due to accrued interest and fees. FWDR does not assume your debts or make monthly payments to your creditors. We do not provide tax, bankruptcy, accounting, legal advice or credit repair services. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution.