4 debt relief options: Which one is right for you?

Tough financial times happen. Thanks, in part, to a challenging economy, household debt has increased.  

If your family’s budget needs debt relief, we're here to help! Here’s a quick guide to four of the best debt relief options, how they work, and when to consider them. Some solutions for debt relief should only be used as a last resort and aren't right for everyone. We've also included some debt prevention tips to avoid falling back into debt.

1. Debt management

Debt management involves planning your finances to take charge of the money you owe. The goal is to set up a repayment plan that works with your budget. Professional credit counselors create debt relief plans or you can choose to DIY a plan.

Credit counseling

A certified credit counselor will review your finances and create a debt management plan (DMP) for you. They may also negotiate lower monthly payments, longer repayment terms, or lower interest rates with your creditors to get you a monthly payment you can afford. However, credit counselors don't negotiate to lower your debt balance.

When you set up a DMP, payment schedules are set by the credit counseling agency. You make regular payments to the agency, and the agency pays your creditors.

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Debt management programs may charge a fee — up to $75 monthly — but they can be worth it if they help you get control of your finances and prevent serious debt issues. The DMP repayment process usually takes three to five years.

DIY debt management plans

If you prefer a hands-on, fee-free approach, you can create and manage your own repayment strategy. This involves evaluating your income and expenses to determine how much you can pay toward your monthly debts and establishing a payment schedule that fits your budget. It would also be up to you to prioritize your debts and negotiate with creditors.

A DIY plan can be an effective debt relief tool, but it does require discipline. A plan is only effective if you stick to it and avoid accumulating more debt.

2. Debt consolidation

Debt consolidation is when you combine multiple debts into one loan, making it easier to manage your payments. You might also get a better interest rate on your debt, saving you money.

 You may have a few options to consolidate your debt:

• Home equity loan or line of credit: If you're a qualifying homeowner with enough equity, you may be able to use your home's value to pay off high-interest debts. You'll typically get a lower interest rate. Your home is collateral, so keeping up with payments is crucial.

• Personal loan: A personal loan is a fixed-rate loan with a set monthly payment over a specific term. No collateral is required with this debt consolidation loan option. The interest rates on personal loans can vary based on your credit score and financial situation. Some have high fees.

• Balance transfer credit card: With this option, you move multiple credit card balances onto one card with a low or 0% introductory interest rate. The low rate is usually temporary. Some cards charge a 3% to 5% fee per transfer.

Depending on the amount and types of debt you have, you may not be able to consolidate all of your debt into one loan. But those you can consolidate may still provide some relief. 

3. Debt settlement

The debt settlement process involves negotiating with creditors to reduce the amount of debt owed. It's for people behind on payments on a significant debt balance. Depending on the lender, it's sometimes a student loan debt relief option.

You work with a debt settlement company or negotiate directly with creditors to agree on a reduced payoff amount. In most cases, you will make a lump-sum payment to settle the debt for less than the full amount owed.

Debt settlement can damage your credit score, so you'll want to learn how it works before deciding on this option.

4. Bankruptcy

Bankruptcy is a legal process for providing relief of debt. There are two main types of bankruptcy for individuals:

• Chapter 7 bankruptcy: Certain debts may be discharged with Chapter 7 bankruptcy, meaning you'll no longer owe them. However, it also involves selling assets to pay off debts, sometimes ones you'd prefer not to give up. Chapter 7 bankruptcy is for people with limited income and significant debt.

• Chapter 13 bankruptcy: In Chapter 13 bankruptcy, you keep your assets and repay your debt over three to five years. You make monthly payments based on your income and expenses. Chapter 13 is often chosen by those with stable incomes who struggle to keep up with debt payments.

Both types of bankruptcy can significantly impact your credit score and remain on your credit report for several years. A bankruptcy attorney can help you determine the best course of action.

The importance of debt prevention

Debt can make it difficult to meet monthly bills and reach financial goals. You may have to choose between financial objectives, such as paying off debt vs. investing — or taking a vacation or saving for a car down payment.

You've probably heard the phrase, "An ounce of prevention is better than a pound of cure." It applies well to debt.

Best practices for minimizing the chance of falling back into debt include:

• Using a budget to help you live within your means

• Building an emergency fund to cover unexpected expenses

• Getting a handle on overspending and impulse shopping

• Not charging more on a credit card than you can pay off in full

As a parent, you want to ensure your kids learn the importance of debt prevention. The average student loan debt is rising. Surprisingly, about 15% of Gen Z has maxed out credit cards. This presents a good opportunity to discuss the downsides of student loans and credit card debt with your teens. By doing so, you can teach them about managing debt and maintaining healthy debt balances, empowering them to make sound financial decisions in the future.

Discover the best money management app for families

Most options for debt relief should be a last resort. But if you're struggling to make your debt payments, it may be time to consider one. Debt relief can lead to budget relief, providing more financial resources for other financial commitments and goals. 

Greenlight® is here to help you with all your family's financial goals — for the adults and the kids. After all, it was designed with families in mind. You can use the app to keep your budget on track and teach your kids to budget, save, and master other essential money skills. Sign up for Greenlight today..