How to pay off debt?

eCollect support team

To pay off debt means to dispense of monetary obligations owed to a lender. In order the borrower to be considered as debt free he has to disburse all liabilities within a certain period of time, marked in the loan contract between creditor and debtor. Even if a debtor does not possess the sufficient financial funds for settling a debt in full, he can use a strict budget to cut his costs and therefore increase his budget. Another option is using professional pay off debt companies, which help consumers surmount their debt crisis. They can offer various repayment plans and even negotiate with the creditors on behalf of the consumer. A subject of debt can decide to either clear the debt in full using one single payment (if he has the financial funds needed) or he can try to settle an instalment arrangement, repaying the amount owed in portions over an agreed period of time. The second option is always in compliance with debtor’s budget, in order to make the process more convenient for the borrower and more easily manageable.

Using a DRO or bankruptcy to pay off debt

Although the Debt Relief Order scheme origins from the United Kingdom, it is now used in a number of other countries across the world. It represents an alternative to insolvency and bankruptcy and can partially or completely discharge a debtor from his monetary liabilities towards a creditor. DROs are a wide- spread method for paying off debt schemes, especially by consumers, who do not cover the financial criteria for debt repayment anymore. This can occur due to job loss, divorce, severe income decrease, etc. DROs are implemented by a high court and during the order’s period of action, the lender is prohibited from pursuing his amounts from the debtor. In the United Kingdom and Wales, a Debt Relief Order is active for 12 months. If after this period the debtor still cannot afford to cover the default expenses, he will be discharged from all monetary obligations he owes towards a creditor. In order for a debtor to apply for a debt relief order in UK or Wales, he has to comply with particular requirements:

If a consumer, who wishes to apply for a Debt Relief Order, has been qualified for such and used it within the past 6 years, he cannot file for such order again, before the 6-years-period has passed; As a Debt Relief Order covers only unsecured loans, borrower’s unsecured debt must be no more than £15,000; After covering all liabilities, a debtor should have no more than £50.00 left as a disposable amount from the total monthly income; Debtor’s assets (estate properties, household & personal belongings) must have a gross value of less than £300 in total; and his car’s (if any) estimated price has to be not more than £1000; If a consumer has already applied for another procedure of insolvency, or such procedure is already or still in motion, e.g. bankruptcy or an Individual Voluntary Arrangement, he will not be qualified for a Debt Relief Order; Although bankruptcy seems tempting for many consumers, it should be used as last resort. This process not only impacts debtor’s credit report in a negative way but also restricts future loan possibilities. Another disadvantage of the pay off debt bankruptcy option is that debtor’s home or personal belongings might be sold; it can also affect one’s business (if the subject of debt is a commercial borrower).

Payment of highest interest or a debt snowball method

When an individual decides to manage his debt problems on his own, he usually has two options excluding the standard debt payment plans. These are the so-called “Pay the Highest Interest First” (also known as the Debt Stacking method), and the debt snowball scheme. Both require composing a list of debt obligations, but there are a lot of differences between them as well. The first method’s name derives from its functions- here the consumer clears the highest interest debts first and then proceeds to the smaller ones. While the snowball method stands for covering the lowest monthly debt charges first and then continue settling the larger ones until all amounts are paid in full.

Debt stacking is also characterised by minimum payments to all debts. When all of them are made, the extra monetary sums saved will go to the default obligation with the highest interest rate. The disadvantage of this technique is that if this debt is also the largest liability, the process will be more time- consuming. Debt snowball method works on the principle of clearing the smallest balances’ defaults first, proceeding to the debts with higher monetary value. Therefore, the consumer might end up paying a higher interest in total.

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