 TITLE: Debt Relief: An Essential Guide CONTENT: What Are the Types of Debt Relief?\n----------------------------------\nThere are four types of debt relief that borrowers can use to work toward becoming debt-free. Depending on the severity of your financial situation and your ability to repay what you owe, one method may be better than the others. Here's a quick summary of each and when you might consider them.\n### Debt Consolidation\nDebt consolidation is the simplest form of debt relief, and you can accomplish it on your own. You can consolidate your debt by applying for a new loan or credit card and using it to pay off existing debts.\nThis strategy works best if you can qualify for a loan or credit card that offers a lower interest rate than what you're currently paying—that typically requires good or excellent credit, which means a FICO® Score☉ of 670 or higher.\nSome balance transfer credit cards offer introductory 0% annual percentage rate (APR) promotions that allow you to pay down your debt interest-free over a period of a year or more. This is an excellent strategy as long as you can pay off the transferred debt before the promotional period ends; otherwise, you'll owe interest on the remaining balance.\nIf you're trying to pay off high-interest debt with a loan, you could choose a personal consolidation loan or, if you own your home, a home equity loan or home equity line of credit. Just keep in mind that if you use your home as collateral for a loan, you risk losing it if you can't keep up with loan payments.\nDebt consolidation is best for borrowers who have a manageable amount of debt and have a relatively high credit score, which is necessary to qualify for favorable rates on a consolidation loan or credit card.\n### Credit Counseling\nIf you're having trouble making your monthly payments and your credit is less than perfect, working with a credit counseling agency could be a good next step.\nCredit counselors can not only help you with basic things like creating a budget, but they can also put you on what's called a debt management plan. With this arrangement, you make just one monthly payment to the credit counseling agency for all your unsecured debt obligations, such as credit cards and personal loans. The agency then uses that amount to make payments to your creditors on your behalf.\nCredit counseling agencies can negotiate lower interest rates with creditors, so you may end up saving money with this option. However, you may be required to close your credit card accounts, and you can't apply for new credit until you complete the debt management plan, which can take years.\nIf you're considering a debt management plan, make sure you're working with a nonprofit credit counseling agency, which can offer lower costs. You can find a nonprofit agency in your area through the National Foundation for Credit Counseling or the Financial Counseling Association of America.\n### Debt Settlement\nDebt settlement companies negotiate with your creditors to settle your unsecured debt for less than what you currently owe. Instead of creating a modified repayment plan like a credit counseling agency does, for-profit debt settlement companies encourage you to stop making payments on your debts and instead make payments into an account with the company.\nAs soon as your balance with the debt settlement company is high enough—the amount can depend on the company and type of debt—it will use the cash to negotiate with your creditors to settle for less than the current principal and interest amount.\nBecause debt settlement encourages you to stop making payments on your loans and credit cards for an indefinite period of time—and could cost you hundreds or even thousands of dollars in fees—it's not a recommended debt relief strategy.\n### Bankruptcy\nIf your debt situation is so dire that you can't even afford to make modified monthly payments on a debt management plan, bankruptcy may be the last resort option. A bankruptcy will do serious damage to your credit and will factor into your credit score for up to 10 years, which is why you should only consider it if you've exhausted your other options.\nThere are two types of consumer bankruptcy, including Chapter 7 and Chapter 13:\n*   **Chapter 7**: With this option, most of your assets are sold to pay off whatever you can, then the remainder of your debt is wiped out. It's designed for people with low incomes who can't afford a restructured debt repayment plan.\n*   **Chapter 13**: With this type of bankruptcy, your debt repayment plan is reorganized to make it affordable for you, and you must complete the new court-mandated repayment plan. The remaining balances left over at the end of the restructured repayment plan—which typically takes three to five years—are discharged.\nOne thing to keep in mind is that, like debt management plans and debt settlement agreements, filing bankruptcy typically won't get rid of your mortgage, auto or student loans. END