Do you face problems when it comes to managing your debt? Or are you struggling with massive debt that you don’t think you will be able to clear in the future? If so, then it’s better to go for debt relief options.
A debt relief program is ideal for people who are getting into debt with time. Also, people who have to pay more interest rates with time on different types of debts need to opt for this approach. This way, you can save yourself from getting into more problems and live a peaceful life.
It would help if you learned several things about debt relief. To give you a clear idea, we have mentioned every aspect of debt relief. Here in this article, you can learn about debt relief programs, debt-relief alternatives, and the drawbacks of debt relief programs that you need to know. So, spare a few minutes and read on.
What Is Debt Relief?
It is a reorganization of debt through different methods or tools so that indebted individual or company can control their finances and manage debt. This debt management method can help you eliminate your debt, either fully or partially. Furthermore, debt relief plans can operate in different ways. These include lowering the interest rate on your multiple loans, reducing the outstanding amount of your debt, or extending the repaying term of your loan.
You also need to know that lenders will only give you a debt relief plan if you cannot pay your debt in the future by all means, and your financial condition is so bad that you can’t opt for an alternative. Highly indebted parties, including small businesses, individuals, municipalities, large companies, and even sovereign states, are eligible for Debt relief programs.
When Should You Seek Debt Relief?
You can consider debt-relief options, such as debt management, bankruptcy, or debt settlement, when you fall into any of the following categories.
- You cannot repay unsecured debt, such as medical bills, credit loans, or personal loans, within five years, even after using all the methods to pay them.
- The total amount of your unpaid debts is more or at least half of your gross earnings.
In the situations mentioned above, it’s best to opt for any suitable deft relief plan so that you can save yourself from getting into more debts and problems.
What Debt-Relief Options You Have?
When it comes to debt relief, you have several choices. It is important to note that these debt-relief programs have their advantages and drawbacks. You need to select the one that is most suitable for your circumstances and preferences.
Here are the debt management options that you need to know.
People looking for advice and guidance to deal with their debts and willing to pay some amount for it can choose credit counseling. In this case, a firm will work with you to design a debt management plan. By offering them a fee, you can simplify your debt payments. They also help you to save a tremendous amount of money paying for interest on debts. Not to mention, you only have to pay one credit payment to the credit counseling company, and your counselors use this money to pay your creditors.
The advantage of using this method is that credit counselors have years of training in debt management, consumer credits, and budgeting. They can help you manage your money in a much better way than you can do for yourself. Your counselor is also responsible for designing a program to pay down your debt on an agreed date with your creditor. So, paying debt on time will improve your credit score. But some creditors are not willing to work with credit counselors. That is why you need to ask creditors before hiring a counselor.
When you have several unsecured debts with much higher interest rates than your monthly income, you need more time to pay down all debt. If you can secure your debt, you can reduce a few interest percentage points that can save you hundreds of dollars every month. This way, you can pay off your debts in a shorter period. The cash-out refinance, and home equity loan can help you use home equity so that you can pay off your debt. These types of loans help you secure your home debt, and, as a result, you get a lower interest rate on the debt you pay off.
Home-refinancing is the best part of paying off all unsecured debt that allows you to pay lower monthly payments. Another advantage is, once you pay all your unsecured debts, it can increase your credit score. But here is the catch – this method increases the risk of losing your home if you don’t pay a line of credit on the new mortgage.
It is another method that allows people with significant debt amount to pay cents on the dollars. Debt settlement is a technique that enables consumers to settle with the creditor. This method is ideal for people struggling with a debt that they can’t afford to repay anytime sooner in their life. In this case, consider getting help from debt relief companies who will create a debt payoff plan with your creditor. They will also negotiate to lower the total debt that you and your creditor need to agree upon.
This debt relief plan allows you to make greater savings by offering you to pay off a less amount of debt compared to what you owe. You can save hundreds of dollars from it to add up to your savings. The drawback of opting for this approach is that it can impact your credit score, as you will pay less than the debt you owed. So, in the future, you might have to face problems while borrowing the money.
You might think that bankruptcy is something scary or troublesome. But it is one of the most common options for people who struggle with a significant amount of debt. It allows you to get rid of your debt as quickly as possible. People who declare bankruptcy are those who want a fresh start. However, bankruptcy is not for everyone. It is the best option to eliminate your debt if it suits your circumstances.
You also need to know that there are different types of bankruptcy known as chapters. Consumers mostly qualify for Chapter 7 or 13. It is important to note that Chapter 7 helps you immediately clear out every debt that qualifies to this category. In the case of Chapter 13, the court orders you a payment plan for five years. After this time, any remaining debt usually gets canceled or discharged. You need to consult a bankruptcy lawyer to determine whether you qualify for Chapter 7 or 13.
After opting for bankruptcy, your creditor can’t contact you to force you to pay the debt. This way, it saves you from creditors who can go after your money or property to get their money. Like all the other options, it also has some drawbacks. You can’t clear particular types of debts such as taxes owed, student loans, alimony, and child support. That means you need to continue paying for these debts. Your credit score also gets affected, which impacts your loan rate.
Debt Relief Programs Can Make Things Worse
Several debt relief companies offer you great plans and programs to deal with your situation. But you should also be aware of the companies that can make things worse. There are several scammers in the field who want to take the settlement money. It is a common problem that many people face as they fail to follow the guidelines and complete the policy. Hence, they end up with even more debts than before.
But it is also true that different debt-relief plans help you take a fresh start so you can live a debt-free life. Before choosing any program, make sure to consider the following things.
- The tax implications
- What fees you need to pay
- What you will need to qualify for the program
- Which creditor will get payments. If your debts are in collection, make sure that the payments go to the right creditor.
Alternatives to Debt Relief Plans
Suppose you get into debts and want to choose other relief options. There are a few alternatives to a debt relief plan that you can consider. These options are ideal for those who are only facing problems with one or two creditors. Additionally, you can only opt for these methods if you don’t have a massive debt amount and you think you can deal with your burden. If you have tried the options mentioned above and think you need a more efficient plan to manage your debt, it’s best to opt for the following options.
Make a Balance Transfer
Consumers who have a significant amount of credit card debt can choose this option. You need to check whether you are qualified to make a balance transfer at a low rate from your new credit card or an existing one. Generally, you get a 0% introductory interest rate for balance transfer for a certain period, primarily for more than a year. This way, you can avoid your interest rate when you are trying to pay off your debt.
However, if you don’t qualify for a new card, check which of your current cards have a low APR or annual percentage rate. Then, call your insurer to confirm whether they offer the balance transfer option to you. Hence, moving the balance from your higher APR credit card to a lower APR can help you save significant money until you don’t charge your credit cards with a high interest rate.
Negotiate With Your Creditors
You can contact your credit card lender without the help of the counselors to negotiate an adjusted payment or lump-sum payment plan for a lower debt amount that you owed. Depending on your creditor, they lower the money you owed so that they get something from your owed money instead of getting nothing.
This alternative will not work if every lender agrees to negotiate with different conditions. But it’s worth trying, as you don’t have to pay fees to the counselor.
Seek Free Credit Counseling
Look for a credit counselor who can help you manage your finances; the best option is to talk to a peer. In this case, you don’t have to pay hefty fees and can easily control your finances. When you find someone who can help you, work with them to design an appropriate plan. Make sure to give them accurate records and documents that they need to achieve your goals successfully.
So, here are some questions that you may have and want to know. Let’s take a look.
How Does a Debt Relief Program Affect Your Credit?
One of the worst drawbacks of debt relief options is that they can impact your credit score when you no longer make monthly payments.
You might already know that FICO credit cards greatly depend on your credit history. So, when you choose any of the programs, your score will reduce. As a result, you have to pay higher interest rates in the future.
You also need to know that this problem is temporary in debt settlement programs, and your credit score improves and moves towards the excellent score category after some time. However, in other cases, your credit score stays low for several years.
Are There Any Legit Debt Relief Programs?
No government program minimizes or forgives your debts when it comes to the debt relief plan. But several companies are working to save you from debt.
If you face problems with your credit card debt and cannot create a repayment program with your lender on your own, it’s best to contact debt relief companies. Depending on your situation and the type of your service, they will guide you throughout the process. They will also advise how you can create plans to repay your lender or deal with your mounting bills.
If you have any concerns, you can advise the State Attorney General before choosing the debt relief command. They can tell you about any consumer complaints about the company and whether the company has any license.
Do Debt Relief Programs Work?
Debt relief plans provide consumers with a workable and fair way out of their financial problems. These programs help you make payments that you can afford while reducing or eliminating the debt you can’t pay. Sometimes debt relief companies ask lenders to reduce the interest rate or monthly payments. They can also ask your lender to decrease the amount you owed to them. In other cases, counselors ask lenders to increase the period of payment terms or give you a year or two to pay the debt.
Whatever plan and company you choose, the main objective will be to clear the confusion and minimize the anxiety that you are experiencing because of a significant amount of debt. Finding the right company and doing your research for every relief program is the first step to control your finances.
Who Qualifies for Debt Relief?
Different debt relief plans have different requirements. But generally, you need to have at least $7,500 or more on unsecured debt from personal loans, credit cards, medical bills, lines of credit, business debts, medical bills, and private student loan debts.
In addition, consumers who have IRS debt and back taxes, federal student loans, and utility bill loans don’t qualify for the relief programs. Some debt relief organizations also don’t offer you home loans, auto loans, and other types of relief programs in certain situations. For this, you need to check your chosen company.
Relief programs can indeed help you in several ways, but opting for the right company and program makes the difference in your life. Hence, your decision is everything when it comes to getting rid of debts. That is why you must research extensively about the company you are thinking to choose for this purpose. Also, look for every possible option that can go well according to your situation. Once you weigh the pros and cons of every debt relief program, you can choose the option that is right for you.
This article originally appeared on Your Money Geek by Lyle David Solomon. Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing.
Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a Principal Attorney for the Oak View Law Group.