Before you can actually choose the type of debt relief that you will use for your credit problems, it is a wise move to know what you can afford to pay first. While financial analysis is not always a requirement, it should be practiced nevertheless at the beginning of any debt relief effort. You have to start taking charge of your finances not just to grow your debt payment fund but also to make sure you stay out of it.
As you make a personal financial analysis prior to debt relief, there are only three categories that you can fall into.
Financial Capability 1: With enough money to spend on basic necessities and debt payments.
This is probably the luckiest among the three categories. This means the financial capability of the debtor is big enough to cover their daily needs plus the minimum payments of their various credit accounts. While it is fortunate that your income is enough to cover all your financial obligations, you will not be qualified for any debt reduction. You are technically not in a financial crisis even though your debts have spiraled out of proportion. In this case, your debt relief choice is debt consolidation.
You can actually try to pay off your debts using the traditional way. This will ensure that your credit score will not suffer as you get out of debt. But if you still want to opt for either of the two types of debt consolidation, debt management or debt consolidation loans, then you may be qualified to do so. In both cases, the debtor will benefit from lower monthly dues because their payment term will be stretched over a longer period. While this has a negative impact on the credit score, it will only be minimal and it will improve as soon as the debtor starts paying off their debt.
Financial Capability 2: With money for basic necessities but not enough for debt payments.
In the next category, the scenario is not as good as the first. In this case, the debtor does have enough to cover their basic necessities but lacks funds for debt payments. In most cases, people under this category has a steady income but unfortunately, it is not enough to cover for everything that they need.
If the deficit for debt payments is only minimal, the debtor can try to increase their income or lower their expenses so be able to afford the options provided in the previous scenario. But if the needed funds are too big, the option for debt relief is debt settlement. Under this program, the debtor will negotiate with the creditor for a settlement amount that is lower than the balance of the debt. If they agree, the debtor will pay for that amount and the rest of the debt is forgiven. The drawback for this is the negative impact on the credit score and the tax implications on the forgiven amount. However, the savings can be significant so a lot of people proceed despite the consequences.
Financial Capability 3: With barely enough to pay for basic necessities and no funds for debt payments.
This is the worst scenario for anyone. In most cases, people under this category have low paying jobs or even none at all. This type of financial situation means they are living on a tight budget and they has to make changes in their lifestyle just to survive. Usually, there is nothing left to pay for credit obligations.
The only debt relief option for this situation is bankruptcy. The debtor will have to go through a means test that will determine if they are eligible for Chapter 7 or Chapter 13. In the former, their debts are totally discharged - but only after valuable assets have been liquidated. In the latter, they are subjected to a low repayment plan which when completed, will prompt the discharge of any balance on their credit. This is probably the worst option for anyone because of the severe impact on the credit score.
Consider carefully where your current finances belong to before you decide on a debt relief program. That way, you can choose the best option that your finances can handle.
As you make a personal financial analysis prior to debt relief, there are only three categories that you can fall into.
Financial Capability 1: With enough money to spend on basic necessities and debt payments.
This is probably the luckiest among the three categories. This means the financial capability of the debtor is big enough to cover their daily needs plus the minimum payments of their various credit accounts. While it is fortunate that your income is enough to cover all your financial obligations, you will not be qualified for any debt reduction. You are technically not in a financial crisis even though your debts have spiraled out of proportion. In this case, your debt relief choice is debt consolidation.
You can actually try to pay off your debts using the traditional way. This will ensure that your credit score will not suffer as you get out of debt. But if you still want to opt for either of the two types of debt consolidation, debt management or debt consolidation loans, then you may be qualified to do so. In both cases, the debtor will benefit from lower monthly dues because their payment term will be stretched over a longer period. While this has a negative impact on the credit score, it will only be minimal and it will improve as soon as the debtor starts paying off their debt.
Financial Capability 2: With money for basic necessities but not enough for debt payments.
In the next category, the scenario is not as good as the first. In this case, the debtor does have enough to cover their basic necessities but lacks funds for debt payments. In most cases, people under this category has a steady income but unfortunately, it is not enough to cover for everything that they need.
If the deficit for debt payments is only minimal, the debtor can try to increase their income or lower their expenses so be able to afford the options provided in the previous scenario. But if the needed funds are too big, the option for debt relief is debt settlement. Under this program, the debtor will negotiate with the creditor for a settlement amount that is lower than the balance of the debt. If they agree, the debtor will pay for that amount and the rest of the debt is forgiven. The drawback for this is the negative impact on the credit score and the tax implications on the forgiven amount. However, the savings can be significant so a lot of people proceed despite the consequences.
Financial Capability 3: With barely enough to pay for basic necessities and no funds for debt payments.
This is the worst scenario for anyone. In most cases, people under this category have low paying jobs or even none at all. This type of financial situation means they are living on a tight budget and they has to make changes in their lifestyle just to survive. Usually, there is nothing left to pay for credit obligations.
The only debt relief option for this situation is bankruptcy. The debtor will have to go through a means test that will determine if they are eligible for Chapter 7 or Chapter 13. In the former, their debts are totally discharged - but only after valuable assets have been liquidated. In the latter, they are subjected to a low repayment plan which when completed, will prompt the discharge of any balance on their credit. This is probably the worst option for anyone because of the severe impact on the credit score.
Consider carefully where your current finances belong to before you decide on a debt relief program. That way, you can choose the best option that your finances can handle.
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