Studies show that Gen Z, those aged between 18 and 23, already have an average debt of $9,593. The amount of debt grows in every age group from Gen Z to Gen X, those aged between 40 and 55.
On average, debt for groups doesn’t begin to decline until later in life but can still reach amounts near six figures.
It’s best to get out of debt as soon as possible, but it’s easier said than done. If you are committed to debt consolidation, find a debt relief program that’s right for you.
Keep reading to learn your options.
The obvious debt relief program option is bankruptcy. Those who can’t pay for a debt management plan or enter a debt settlement choose this option instead.
Chapter 7 bankruptcy is the most common form of liquidation because it can erase most medical debt, unsecured personal loans, and credit card debt. If you qualify, the process takes about three to four months.
There are some debts it won’t erase. For example, Chapter 7 bankruptcy won’t get rid of taxes owed or obligations regarding child support. Student loan debt is also highly unlikely to be forgiven.
If you used a co-signer, that person will become responsible for the debt when filing for bankruptcy. If your debts were to pile up again, you won’t be able to file another Chapter 7 bankruptcy for eight years.
If you want to get out of debt with bad credit, you should know that your credit score will decimate with the bankruptcy filing. This debt relief method stays on your credit report for up to 10 years even if you restore your credit history.
This is huge because your credit history will affect your chances of getting a lease, your eligibility for jobs, and how much you pay for car insurance. When your credit is already bad, this won’t be such a big deal.
Keep in mind that not everyone with overwhelming debt will qualify for bankruptcy. If your income is above the median level for your state, you might have to file for Chapter 13 bankruptcy.
Chapter 13 bankruptcy works as a repayment plan rather than a method of wiping all of your debt. Chapter 13 is a three or five-year court-approved plan based on debts and income.
If you can stick with the plan for the entire term, the remaining unsecured debt gets discharged. It takes longer than Chapter 7 to complete.
When you keep up with payments, you get to keep your property. With Chapter 7 bankruptcy, you might have to give up property that you want to keep but the rules vary by state.
Certain property types are exempt from bankruptcy. For example, part of the equity in your home and motor vehicles up to a given value are exempt.
Another difference between Chapter 7 and 13 is that Chapter 13 bankruptcy stays on your credit report for only seven years from the filing date.
A lot of people turn to a debt management plan to consolidate debt. Debt consolidation in this form allows you to pay your unsecured debt, like credit cards, in full. However, you often get a reduced fee or rate.
Instead of having multiple payments, you’ll make a single payment each month to a credit counseling agency. They will then distribute the amount you pay to your creditors.
Credit counselors and credit card companies create agreements to help debt management clients learn how to get out of debt fast.
Until you complete the plan, you’ll need to live without credit cards because your accounts will be closed. While debt management plans don’t directly impact your credit score, closing a credit card account can hurt your score.
After completion of the plan, you can apply for credit again.
If you miss payments made through the plan, you could be voided from the process. Always read through the fees and alternatives for dealing with debt before committing to a consolidation plan.
Another one of the common programs for debt relief is debt settlement. Compared to bankruptcy, financial experts might say that debt settlement is not a great alternative.
Debt settlement is generally a last resort for people who face overwhelming debt and don’t qualify for bankruptcy.
A debt settlement company will ask you to stop paying your creditors and put the money you owe into an account that they control. When the money accumulates in your account, you’ll fall further behind on payments to the creditor.
Creditors will begin to fear they won’t receive any payment and might accept a smaller lump sum offer instead. They may agree to stop pursuing you for the entire amount.
However, not paying these bills will result in penalty fees, collection calls, and possible legal action against you.
Debt settlements won’t stop any of these things from happening and it could take up to six months for negotiation offers to begin. Depending on the amount you owe, the process could take years.
Continued late payments will cause your credit score to go down. If a creditor were to take legal action against you, you’ll likely deal with property liens and wage garnishments.
You can try to settle the debt yourself or you can hire a debt settlement company. If you do hire a professional, research to ensure you aren’t working with scammers disguised as debt consolidation experts.
If the debt amounts are forgiven, you could face a bill for taxes on those amounts. The IRS counts this as income.
You always have the option to create your debt relief program. You can act as your own credit counselor by contacting creditors and explaining why you fell behind.
During the conversation, ask about what concessions you need to catch up. A lot of credit card companies offer hardship programs where they lower interest rates and waive certain fees.
You can also educate yourself on debt settlement and negotiate an agreement between your creditors on your own.
If your debt isn’t that overwhelming, you have more strategies to choose from. For example, if you still have a good credit score, you can apply for a debt consolidation loan that gives you some breathing room.
Debt relief programs typically fall under bankruptcy, debt management plans, and debt settlements. DIY debt relief is also an option if you are well knowledged financially and don’t have an overwhelming amount of debt.
By learning the differences between these methods, you can choose the right debt relief program for your situation.