The only thing more distressing than the fact that 80 percent of U.S. adults are in debt is the indisputable truth that a significant amount also have bad credit.
On the one hand, bad credit limits debtors in the same way as anyone with bad credit. But on the other, having damaged credit and debt puts many strategies like personal loans and zero-interest balance transfers out of reach for debtors.
So, what can debtors with growing debt but bad credit do to climb out of the hole? Consider one of these options:
Peer-to-Peer (P2P) Lending
When someone has bad credit, creditors deem them as risky borrowers. If a debtor has lousy credit, creditors won’t be compelled to offer favorable rates or alternative lines of credit to kickstart your repayments. P2P lending allows debtors to bypass institutions—and middlemen—and borrow from individual investors.
To explore your loan options, you’ll need to create a profile on a lending platform and post your loan request. There are several p2p platforms to check out. Start your research with MoneyUnder30’s breakdown of the top lending sites.
Leverage Your Home’s Equity
Mortgages may be the primary source of people’s debt, but plenty of households have a silver lining to their current money woes—and they’re sitting in it. Even if you have bad credit, there’s nothing an institution can say about a homeowner using some of the equity in their home.
Through either a home equity loan, second mortgage (a.k.a. home equity line of credit) or cash-out refinance, debtors can access up to 80–90 percent of their equity. A home equity loan involves taking out a new line of credit that’s secured by your home, a second mortgage is a second loan based on your current equity, and a cash-out refi replaces your existing mortgage with a new one while providing debtors with cash as equity. Each of these methods carries different risks, however, so make sure to weigh the pros and cons before you proceed.
Settle Debt
The reason many debtors with damaged credit are in their situations is due to lapsed payments. But when it comes to debt settlement tactics, that can actually work in a debtor’s favor. With payments far past due, and creditor mail and collection calls a constant, debtors have some leverage in their situations. Debt settlement can occur by debtors on their own, or through companies, and is usually a multiple-year process of negotiations to settle a balance, or balances, at lower amounts.
The decision to use debt settlement services or try to settle debt independently will depend on each debtor’s emotional health and comfort level negotiation with creditors. Going it alone will save the potential fee that debt settlement companies charge when they’re successful lowering a debtor’s balance. However, as evidenced by one provider, Freedom Debt Relief’s testimonial page, debt and depleted emotional strength are a natural cause and effect for many debtors.
Declare Bankruptcy
Another way to relieve some—or all—of your debt with bad credit is to declare either chapter 7 or chapter 13 bankruptcy. Bankruptcy is perhaps the most common strategy for debtors with unsecured debt and bad credit. Declaring bankruptcy via either chapter 7 or 13 can eliminate unsecured debt completely. However, in chapter 7, the court will liquidate some of a debtor’s personal assets to pay back those debts whereas in chapter 13 a debtor can keep their possessions as long as they make court-ordered payments for three-to-five years. Chapter 7 also stays on credit reports longer than chapter 13 (up to ten versus 7 years). Both strategies carry expenses like attorney fees, court costs and mandatory financial education courses.
It’s no fun having debt, and being limited by crumby credit doesn’t make life any easier. Understand the risks and rewards of each of these strategies against your specific financial situation and then decide the course best for you.
About Jammie Morey
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