Alternatives to debt relief

When you’re overwhelmed by debt, you can feel pressure to seek out immediate relief. Debt relief companies may seem like an obvious next step, but they can come with some pretty serious risks. For example, you could incur serious credit damage. This is because many debt relief companies might tell you to stop making regularly scheduled payments, and even then your creditors may not agree to work with the company.

Although working with a debt relief company can be helpful for some, not everyone will benefit. If you find yourself in this boat, there are alternatives that don’t pose as large of a credit risk, like negotiating with your creditors yourself, tapping into your home equity to get a more affordable rate or working with a nonprofit credit counselor.

5 alternatives to debt relief

A good debt relief company could potentially save you money by negotiating your debts with your creditors for you — but there’s no guarantee that all your debts will be settled, which means paying less than what you owe. This can leave you with further damage to your credit score and increased debt, as you will also be responsible for paying any late fees and accrued interest.

But there are many debt relief options beyond working with a company. Alternatives will require some additional work on your end, but they could help you avoid some of the risks you would otherwise take on.

1. Adjust your budget

The foundation of financial wellness starts with your income and your ability to budget. When creating a plan that works for you, make sure you save room for at least minimal nonessential or discretionary spending. A budget based on the complete removal of all discretionary spending is not sustainable, which is why balance is important.

One of the most common budgeting approaches is the 50/30/20 rule. This divides your spending into three categories: needs, wants and savings. In this case, you can put savings toward paying down debt.

Just make sure you always have a bit of cash stashed away for emergencies. Having an emergency fund will reduce the chance that you’ll need to take out debt to cover unexpected costs.

2. Negotiate a payment plan with your creditors

Communication is key when getting your finances back under control. While it may feel intimidating to connect with your creditors, being proactive could help you lower your debt levels and prevent severe credit damage. The moment you get the notice that your debt has been sent to collections, it’s best to contact your creditors, explain the situation and start negotiations.

In some cases, creditors may be willing to help you manage your debt. If they offer assistance, make sure it’s not for a fee — if they charge a fee or refer you to a company that does, it’s likely in conjunction with a debt relief company.

3. Consider debt consolidation

Debt consolidation is the process of combining multiple debts into one. There are many ways to consolidate debt, including taking out a new loan, line of credit or balance transfer credit card to pay off multiple debts. Consolidation can make your debt more manageable, as you will only have to keep up with one monthly payment instead of juggling several payment due dates.

If you secure a lower rate on your consolidation loan than the average of your current debts, you may save thousands of dollars in interest. This solution is especially ideal for those dealing with high-interest credit card debt. It can also help boost your credit score by lowering your credit utilization ratio.

If you choose to consolidate your debt, make sure to compare quotes by prequalifying with at least three different lenders to ensure you get the best offer available to you. When comparing lenders, look beyond the APR to get a well-rounded view of each lender. Look for any discounts or member perks, and read through the customer reviews to see if there are negative trends or patterns.

Know that this method is only worth it if you can identify what caused the accumulation of debt in the first place and take action to prevent it from happening again in the near future. Look at your monthly, weekly and daily spending and compare it to your monthly income. Carefully monitor your credit card usage and online shopping patterns as well.

4. Look into home equity products

Home equity products allow you to tap into the equity you’ve already built in your home. Home equity loans and lines of credit (HELOCs) come with longer repayment terms than traditional personal loans, making it easier to pay down large amounts of debt over a longer period of time.

Home equity loans function similarly to traditional secured loans, but come with repayment terms that last between five and 30 years. HELOCs function similarly to credit cards by allowing users to borrow what they need when they need it during the draw period, which typically lasts between 10 and 15 years. The repayment term can span up to 20 years.

Both products are secured by your home and typically cost less than other financing products because the lender incurs less risk. This can make them less expensive than the bad credit loan rates you might receive if you have less-than-stellar credit. However, if you default on the loan, the lender could seize your home or property to satisfy the delinquent debt.

5. Talk to a financial advisor or credit counselor

If you’re overwhelmed with your financial situation and don’t know where to start, your bank or credit union may be able to put you in touch with a financial advisor or representative. These individuals look behind the curtain at your finances and talk you through opportunities for you to do better in the future and walk you through what to do now.

Likewise, you could seek help from a credit counseling agency. Similar to financial advisors, counseling agencies take a look at your financial situation and create plans tailored to you and your needs to help you better manage your debt.

Credit counseling comes in the form of both for- and nonprofit agencies. If possible, avoid turning to a for-profit credit counseling company first, as these are basically another form of debt relief and often come with costly fees.

Nonprofit agencies may partner you with a dedicated counselor for free, and many offer similar services for-profit agencies offer. For example, there are both nonprofits and for-profit agencies that will establish debt management plans for you.

When to consider debt settlement

There are some specific scenarios where debt settlement is likely the best choice for you and your finances. You may want to explore debt relief if any of the following scenarios apply to your current situation:

• Considering bankruptcy. If you are on the edge of having to file bankruptcy, it may be time to turn to professional advice.
• Struggling to handle debt. If your debt keeps growing after exhausting all of your options, debt relief companies may be able to settle your debt for less than what you originally owed.
• Can’t afford monthly bills. If you are struggling to afford the necessary expenses and are falling behind on your bills, reach out to a company sooner than later to avoid default.