Help Your Finances with These 3 Debt Reduction Programs

Debt reduction programs generally refer to strategies to assist borrowers deep in debt. If you have a relatively manageable amount of debt, you will benefit by simply making regular efforts to repay the debt on schedule. Entering into a debt reduction program will not be worth the hassle for most borrowers. However, if you are unable to keep up with your debt given your current income, it may be time to consider more drastic steps. There are varying levels of severity to debt reduction programs, starting with basic modification.

#1 Loan Modification

Loan modification is often used to describe a wide variety of debt reduction strategies from refinancing to settling. In the most narrow interpretation, loan modification is the process of directly changing your contract with the original lender. If you use an outside source to carry out the modification, you will be entering into a field of debt reduction that involves much steeper penalties. First, try working out a new plan with your existing lender to avoid this step. Contact the lender directly to explain the changes in your finances that no longer allow you to pay the debt according to your current schedule. Reasons for modification include loss of job, divorce or ongoing illness. Next, work with your lender to find a more comfortable schedule that will help you avoid defaulting on the loan. Not all lenders will be flexible in providing you with options. However, if you can prove the modification is in the lender's best interest, you may find beneficial results.

#2 Debt Settlement

Settling debt is a more drastic step than modifying debt. When you modify your debt, you are still agreeing to pay off what you owe. Ultimately, your credit score will reflect that you paid off the debt. With settlement, though, you are not paying off your obligation. Your credit score will reflect that you closed the loan in a manner the lender did not approve of. Because of this, settlement is less attractive. It does offer unique benefits over modification for those with larger needs. Through settlement, you can reduce your total debt load instead of just restructuring the payments. This is particularly useful if you have taken on a large amount of student debt or too much credit card debt. Since these loans are not distributed against an asset, it can make more sense to a lender to settle for a lower amount instead of pursuing a repossession.

#3 Bankruptcy

Many borrowers do not think of bankruptcy as a viable debt reduction strategy; they may think of it as a failure to repay debts. However, bankruptcy court was designed as a way to reduce the debt burden for Americans suffering from crippling debt loads. If you qualify for bankruptcy based on your debts, it is worth learning whether the protection can offer a solution. Through bankruptcy court, you can finally close your debts and assure your lenders have no further claims to your money or your assets. You will have to make sacrifices, but it is the ultimate debt reduction solution for the most desperate borrowers.

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