Methods to Reduce Your Credit Card Debt

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If you’re looking for a way out of debt, there’s usually little you can do by yourself. Unless you have knowledge of banking and finances, the best option you have is to search for a good credit counselor. The advice of a professional can make the difference between credit card debt relief and bankruptcy. More often than not, institutions in your area can even provide you free financial counseling; the National Foundation for Credit Counseling or the American Credit Foundation are only two such examples.

Resorting to credit counseling can reduce your monthly payments up to 50%, using various methods, such as bills consolidation in only one single monthly payment, interest rate reduction, counseling for handling over-the-limit and late fees. The credit counseling specialist will explain you in detail all options that are available for your situation, as well as help you make a decision about which one to choose among credit management programs, debt consolidation, credit card debt settlement and even bankruptcy.

Indeed, there are situations in which filing for bankruptcy is a better alternative than any other method of credit card debt reduction. These situations occur because some methods of credit relief (such as debt settlement) are not federal laws, and you might end up being harassed by endless phone calls from your creditors while in the process of settling or consolidating your debt.

Debt settlement

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Debt settlement or debt negotiation is a method of reducing credit card debt, in which both parties involves agree to reduce the overall debt so that the debtor can pay off the balance in full. Debt settlement involves one single larger payment for the total debt, which is lower than the sum of all monthly payments the debtor should make in order to pay his full debt. This might look unreasonable at the first sight, but for the creditor it makes perfect sense. In certain situations, it is best to accept a smaller immediate payment than risk for the debtor to go bankrupt and be unable to pay off his debt. Unlike in debt consolidation, in debt settlement the debtor stops the monthly payments completely, so that they force the creditor to settle for a lower sum.

There are three means of negotiation with a creditor. You can do it yourself, if you have the knowledge and persuasive power; you can use legal advice from a certified professional or you can resort to the services of debt settlement companies. The latter require different methods of payment and they can sometimes charge high fees. In order to make sure that you pay them only for their services, you should choose a credit card debt settlement company that charges its fees only after they manage to settle the debt successfully and only charges 20% or less of the total amount they managed to reduce the outstanding balance. Make sure you are perfectly aware of the contract conditions, or else you might pay the settlement company up to 75% of the outstanding balance.

When you use debt settlement as a method of credit card debt relief, you might settle your debt for as little as 50% of what you originally owed your creditor. Using a debt settlement company to negotiate in your behalf can definitely be a huge advantage as opposed to negotiating yourself, as this type of companies usually has a built up business relationship with the creditor and the process of settling your debt is faster and more convenient than when the debtor acts on their own.

Debt consolidation

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Many people mistake debt consolidation with debt settlement. They are both forms of credit card debt relief, but there is a fundamental difference between the two of them. While debt settlement can apply to either one credit card debt or to several of them, debt consolidation is only possible when you’ve taken several loans. If you have problems with making the payments on time, then you must consolidate all your debt. Debt consolidation means taking one larger loan to pay off your previous smaller ones. The new loan will allow you lower interest rates, payable over a longer time span.

Many individuals on the verge of bankruptcy prefer this method of credit card debt relief. Filing for bankruptcy interferes with one’s credit score so badly that the individual won’t be able to take another loan for as long as seven years. When it comes to debt consolidation, even if it affects your credit score, it isn’t by far as dramatic as bankruptcy.

You can only consolidate unsecured loans. An unsecured loan is the debt you didn’t use any asset (such as a property or a car) to guarantee for. There are many types of unsecured loans but the most common ones are student loans, credit card debt and credit card lines, unsecured personal loans.

Bankruptcy

Bankruptcy is the situation in which the debtor reaches insolvency, as they cannot pay off their debts to the creditors anymore. It is a legal procedure orchestrated by a court and initiated by the debtor. In the UK, as opposed to the US, company bankruptcy is only one form of insolvency, along with liquidation and administration. The most common types of credit card debt relief through bankruptcy are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy unfolds under the form of liquidation. In liquidation, you can only keep exempt property, while all other properties must be sold in order to pay off your debt. Liquidation can be filled by both very small companies and individuals as a consequence of credit card debt. Larger companies fill for bankruptcy for other financial reasons. After selling some of your assets to pay off your debts, your unsecured credits will be erased. When it comes to secured debts, only some of them will be erased, while you are left with three options to pay off the rest of them: returning the property rights to the creditor over the assets, continuing to make your monthly payments for the assets or paying the creditor a sum for the asset equal to its replacement value.

In Chapter 13 bankruptcy (also known as Wage Earner Bankruptcy) you get to keep all your assets but have to make monthly payments that can last up to five years, so that you can cover a certain portion of your initial debt. There will be a minimum payable amount of money that depends on your income, your credit card debt and the sums you’ve already paid for the unsecured debts if you’ve previously filed for Chapter 7 bankruptcy.

Bankruptcy is sometimes the best method to relief your credit card debt because, as soon as you start the legal procedures, your creditors won’t be able to sue you for not making your payments, nor will they be able to claim any of your assets.

There is no universal strategy for debtors to manage their finance efficiently, as each of them has different annual income, contracts clauses with creditors and interest rates to pay. It is never a good idea to randomly choose one of the aforementioned solutions for credit card debt relief before you carefully analyze your situation and go through all possible options with a certified financial advisor.