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Eliminating Your Debt

Recent headlines regarding the world debt crisis and the U.S. debt ceiling debate likely led many servicemembers to reflect on their own financial situation. For those in debt, it was a sobering reminder that financial troubles can be a slippery slope. This is especially true for those currently deployed or facing potential deployment.

Thankfully, there are a number of options for tackling debt – the trick is finding the one right for your situation. Below are descriptions of the most common debt relief strategies, and information on some of the protections afforded to members of the military as part of the Service Members Civil Relief Act.

Optimized Self-Payment

Many households with a small amount of debt can eliminate it through better budgeting or customized self-payment schedules dubbed “avalanche” or “snowball” to more quickly eliminate debt, interest and your overall balance. If you have some flexibility within your monthly budget or have cash resources on hand, this is the best option to consider because it does not impact your credit score or expose you in any way to creditors.

Cash Out Refinance

Those military families that hold high credit card debt and no cash, but do have a good credit score and own a home with a significant amount of equity, might consider a cash out refinance. With mortgage rates still at all-time lows, this is a good time to secure a refinance if you qualify. In this transaction, you would borrow enough money to refinance your home and pay off your debt at the same time. This consolidates higher credit lines into your home loan and a single payment with a lower interest rate.

The danger is that you are moving unsecured credit card debt into a secured home loan, meaning you are placing your house as collateral in the event you default. Families should carefully examine the loan payment schedule and their financial situation to ensure they can meet payment obligations on the new loan.

Credit Counseling

Credit counseling companies negotiate standard reductions of penalties and interest charges on debt, but leave the actual principal balance intact. This offers a reduced time to payment and lowered monthly payments with minimal impact to your credit score. However, it is generally a small reduction in the overall amount you owe, and the fees charged by counselors can add up over time. This avenue is generally best for those who have a large amount of debt but aren’t in dire circumstances.

Debt Settlement

Debt settlement is an aggressive course of action in which you do not make payments to creditors while a settlement is negotiated on your behalf. This can dramatically reduce the amount you owe creditors while also resolving your debt quickly. However, it will lower your credit score and can subject you to debt collection efforts and even lawsuits. It is best reserved for those with a high amount of debt and no realistic way to resolve it. The only remaining option other than debt settlement would be to declare bankruptcy.

How to Choose

The challenge then is first gaining an accurate picture of your debt situation and then choosing the appropriate measure for your needs. At Bills.com, we recently launched a tool to help with this decision making process.

Debt Coach is a free tool that provides you with a complete picture of your debt, and then asks you to set priorities for your personal situation (ex. maintain credit score, eliminate debt quickly) so it can recommend the best option for your needs. The tool is also filled with videos and other resources to help explain debt terminology and solutions so that you are well armed with information. You can find Debt Coach at https://debtcoach.bills.com

Military Protections

Military families also enjoy some unique protections as part of the Servicemembers Civil Relief Act (SCRA) that can help with debt relief or insulate you from incurring future debt. These include mortgage relief programs, a six percent cap on interest rates, and protection from eviction, among others. You can find more information on the act through this link at Military.com, or visit with your base Family Support Center.

Of course, the best way to eliminate debt is to avoid it in the first place. Practice good money management skills and plan for rough financial situations to avoid incurring debt. However, if you are stuck with credit card bills or under water in a mortgage, consider some of the options above to eliminate your debt and take back your financial life.

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Ethan Ewing manages Bills.com, a website business which provides practical financial advice and resources to everyday people. Prior to joining Bills.com, Ethan was a Vice President for Experian Interactive, a leader in online marketing and advertising, where he was responsible for developing online partnerships with many of the internet's largest properties. Ethan has also built a website business for Ameriquest Mortgage, managed a mortgage origination operation and consulted on secondary market bulk mortgage acquisitions. Ethan received his BA from Denison University, where he was a captain of the men's lacrosse team.

Bills.com's goal is to help Americans better manage their financial matters, with a focus on monthly budgeting and cutting expenses. Check out www.Bills.com/IQ to get your free BillsIQ score and find out how financially fit you are.

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