When looking for debt relief, it is important to do some research to figure out which of the several options is optimal for your situation. The Internet is a great source, but always be sure to check the credibility of a particular article or website. Here is a brief overview of the major debt relief options and whom they work best for.

Debt Consolidation Loan

In a debt consolidation loan, you use one loan to pay off various other loans or lines of credit. This loan will generally have a lower interest rate, as well as a lower monthly payment. The payment you make to this loan is distributed amongst your creditors. The most common type is a home equity loan, or second mortgage, in which your home is used as collateral. A debt consolidation loan takes several years to pay off, and you pay the entirety of your debts, plus interest. This debt solution works best for people who still have relatively good credit, resulting in a lower interest rate on this loan, and have substantial equity in their home. It is best for people who are only trying to get out of debt, not overhaul their financial habits.

Consumer Credit Counseling Services (CCCS)

In consumer credit counseling services, you have new and hopefully expert eyes take a look at your debt situation to offer advice and solutions. They provide different strategies for debt solutions, and take your entire financial situation into account, rather than just your debt. While they work with creditors to reduce your monthly payments, you still pay the full amount of your debt, and credit counseling also has a negative impact on your credit rating. Keep in mind that CCCS was originally established by credit card companies to help track down people who were not paying their creditors. CCCS works best for people with less than $10,000 in debt and have verified they are working with a reputable company.

Bankruptcy

Filing bankruptcy should definitely be a last resort. The two types of bankruptcy applicable to consumers are chapter 7 and chapter 13. In chapter 7 bankruptcy, your assets are liquidated and your debts are eliminated in one quick move. Only people with low income, few assets, and a demonstrated inability to pay their debts once their basic needs are covered, quality for chapter 7. In chapter 13 bankruptcy, you set up a program through a trustee in which you pay a portion of your debts in a plan that works for you. Chapter 13 bankruptcy is best for people with high income who are facing foreclosure or tax problems. Although bankruptcy seems like a quick and easy fix for debt, keep in mind that it remains on your credit record for 7 to 10 years

Debt Settlement

In Colorado debt settlement, you take a lump sum of money, or make high monthly payments into a trust account until you have a lump sum of money, which is then used by the firm or company you are employing to negotiate with creditors. You pay a portion of what you owe and are absolved of your debts. Although it affects your credit score negatively, most debt settlement programs are completed in less than two years, meaning you are shortly able to rebuild and recover your credit. Debt settlement works best for people with $10,000 or more in unsecured debt who have a lump sum of money ready to use, or who can make high payments into an account. It also works best for people who are willing to make a commitment to long term financial change.

Before answering this questions, we need to understand what exactly a credit rating is and how it is determined.

Put simply, your credit report is determined by your history of borrowing and repaying. If you pay your bills on time, and manage your debt well (meaning you don’t live beyond your means, accruing more debt than a small per cent of your income), your credit score will remain healthy. Other things, including your profession, and stability or lack thereof, also affect your credit report. When you apply for new credit, or for another type of loan, the lender or creditor checks your credit report to determine your creditworthiness, or how likely you are to pay your debt back. If your credit is good, you generally benefit from more loan opportunities, and lower interest rates.

Unfortunately, taking part in the debt settlement process will damage your credit rating. There is no way to avoid this for the simple reason that you stop paying your creditors. However, if you are having a difficult time making payments on time, your credit may already be bad. Keep in mind that other debt solutions, including Consumer Credit Counseling, and Chapter 13 Bankruptcy, also negatively affect your credit, usually more so than debt settlement because they are more prolonged. This means that it is longer before you are out of debt and on your way to restoring your credit. Also, declaring bankruptcy leaves a permanent mark on your credit record; debt settlement does not.

Upon completing the debt settlement process, you can quickly begin making efforts to restore your credit. The easiest way to do this is to pay your bills on time and limit the number of credit cards you have, and the amount that you use them. There is no quick fix for your credit score, only time and financial discipline.