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What Is Debt Relief?
Debt relief is a program to reorganize, reduce, or refinance debt to make it easier for the borrower to repay it. The primary goal of consumer debt relief is to help you tackle massive debt and save a little money in the process. It will still require you to put in the effort, but it makes this struggle significantly easier.
A debt reduction service can take a number of forms, which we’ll talk about in more detail later on. Let’s take a quick look at what it can involve:
- In some cases, the goal will be to dramatically reduce the amount owed;
- In some cases, a counselor will ask your lenders to lower the original interest rate;
- In some cases, it’s about extending repayment terms to give you enough time to get your finances in order.
Whatever form it takes, a debt relief company will extend a helping hand to stop the chaos, confusion, and anxiety that you may be experiencing. Bear in mind that it’s an important decision, and you should never take these measures on your own. The agency’s job is to give you a head start in regaining control of your finances and build you a solid plan of action.
Examples of Debt Relief
Let’s say you haven’t been making timely payments, and now you’re far behind on them. So, you come to an agency with the request “I need to reduce my debts.” A counselor will typically ask you to temporarily stop payments. The reason is that you want your lender to believe that you’re completely unable to repay the full amount.
In the meantime, open a savings account and put monthly payments there. When there is enough money to pay a lump sum (about half of your debt), the counselor will start negotiations for debt reduction. On your behalf, they will present the lender with new conditions. For example, to pay the lump sum. Alternatively, it can be a longer repayment schedule or lower debt overall.
When You Should Seek Debt Relief
There are certain conditions that you need to meet in order for the process to go smoothly. If you check all of the following boxes, you can consider applying:
- Your debt is significant but not completely out of control. A professional will set your affairs in order, but ideally, you should have moderate amounts of consumer debt. In this case, you can get more effective leverage over your lenders.
- You can manage a new plan to pay off your debt. While you reduce debt, some of it doesn’t go away. You need to be sure of your abilities to sustain the new schedule and repayment amounts for a long time. Otherwise, it may make the situation even worse.
- You’ve got your spending and income figured out. These programs shouldn’t become an ultimate enabler to continue unhealthy spending habits. On the contrary, you need to completely rethink how you use your money and get ready to become more financially responsible.
Your credit score is decent. When you get debt relief, your FICO score may go down. But more importantly, you need to have a good score in the beginning in order to get affordable interest rates, preferably, in the single-digits.
Pros and Cons of Debt Relief
Are debt relief programs good? As with any serious financial decision, there are positive and negative aspects. Let’s start with the benefits of the debt-relief options that we offer:
- Reduced amount of debt. They can get you as much as 50% off of the original sum if you have the means to pay off the rest.
- Lower monthly payments and interest rates. You will have the stability of knowing you need to pay less, and the overall debt will no longer seem unmanageable.
- Suitable for your budget. The new terms will be more affordable, and in line with your income, so it will be easier for you to manage it monthly.
- An opportunity to start over. Debt help is like a second chance to start your financial journey on the right path. Only this time, you won’t repeat the same mistakes.
- Stops collection agency calls. You will forget about non-stop calling from collectors, and you will be able to focus on your repayments in peace.
With that being said, a debt reduction program will also include some drawbacks. We want to mention them to help you see the full picture:
- A hit to your credit score. Late payments and settlements will be flagged on your credit report for seven years.
- Long time frames. Technically, you’ll be in debt for a longer time than you initially anticipated.
- No guarantees. There is a chance that lenders won’t accept the terms you propose.
Penalties are a possibility. Because you are not actively paying down your debt, the lender might demand penalties for late payments.
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Different Types of Debt Relief Programs
We’ve mentioned that every case is unique. So, each one can require a different kind of debt relief solution. The methods and timeframes for all alternatives vary, so some of them will be more or less suitable for you. Let’s look at some of the most common options.
Credit Counseling
Credit counseling is professional assistance for people with large amounts of credit card debt. The term is also interchangeable with financial counseling. It’s a gentler approach, although it doesn’t always help with difficult situations.
What counselors do is analyze credit reports and scores, give advice on managing your money and debts, help you develop a budget, offer free educational materials, and, finally, organize a plan to pay down your debts.
Pros:
- Minimal impact on your credit score;
- No debt forgiveness and long-time commitment;
- You’ll learn how to manage personal finances.
Cons:
- You need to do your own research;
- It’s not effective for more serious cases.
Debt Consolidation
Debt consolidation involves taking out a new loan to pay off other liabilities and consumer debts. The best debt relief company should be able to find you a loan that has a significantly lower interest rate than your existing loan. As a result, you will pay less in interest down the line.
The fact that you have to make one payment instead of making multiple payments is very convenient for most people. Consolidation means that you can streamline your expenses and keep up with a single repayment schedule. This minimizes the possibility of being late on your payment.
Pros:
- The interest rate on the consolidation loan should be lower;
- You have to pay only one monthly bill;
- You can still use your credit cards.
Cons:
- It highly depends on your credit score;
- There are borrowing fees associated with loans.
Debt Management
A debt management plan (DMP) is a program where you send a monthly payment to a credit counselor. In turn, they distribute the funds to your creditors. DMPs usually last three to five years. By this time, you should be free from debt.
Similar to consolidation, there is the convenience of not having to worry about multiple bills every month. You and your counselor will draw up a clear plan that you should stick to throughout the program. However, keep in mind that you won’t be able to obtain new debt while participating in a DMP.
Pros:
- You can cancel your commitment at any time;
- It’s a structured plan with a finish-line date to shoot for;
- Doesn’t require opening another line of credit.
Cons:
- You are required to close all of your credit card accounts;
- If you miss a payment, the new terms will be voided.
Debt Settlement
Debt settlement is a credit debt option where you offer a lump-sum payment to a creditor. In exchange, they accept a portion of your debt and forgive the rest. The success of this venture depends on who is speaking on your behalf. If you have the right person, you can get a good deal and save lots of money.
There are some risks since you stop making minimum monthly payments on that debt. But if you’re in need of a more drastic solution, late fees, interest, and damage to your credit score may be worth it.
Pros:
- You get the chance to pay less than you owe;
- Your debts will be repaid in two to four years;
- You keep your assets and repay your loan comfortably.
Cons:
- It’s considered a risky measure;
- It requires negotiations with multiple creditors
Other Possible Alternatives of Debt Relief
We’ve gone over the most effective debt relief options. Now let’s look at lesser-known methods just to learn what else is out there.
DIY Route
A Do-It-Yourself option means taking any option described above but approaching it without professional help. This method isn’t for everyone. However, if you have the discipline and enough knowledge, it may work out for you.
Pros:
- You’ll learn more about your spending habits;
- You’ll come out of the experience with better tools to manage your finances.
Cons:
- You’re on your own;
- It will take a lot of work to deal with the creditors;
- There is no structure or professional guidance.
Government Debt Relief Programs
There are some federal debt relief programs designed to help those with low incomes and/or bad credit. However, big debt is something you’ll likely have to handle without government help. The reason is that they exist at the national level, and it’s very hard to get into them. State-run or sponsored programs are equally few and far between.
In several cases, Federal programs do make sense. For example, some kinds of debt, such as student loans, don’t qualify for debt relief. Or you can request loan forgiveness for working in public service or as a school teacher.
Generally, you can only count on specialized credit relief agencies to get quality help. Not only will they definitely find time for you, but they will also draw a personalized plan. With government programs, there isn’t such a luxury.
Bankruptcy
When a person or an organization can’t follow through with their financial obligations or make payment to their creditors, they file for bankruptcy. It’s usually considered a last resort. But the bottom line is that it essentially allows you to make a fresh start.
Bankruptcy relieves you from your debt, but there are some serious, long-term effects. Reports will remain for 7-10 years, which affects your ability to apply for new credit and get approved for loans with favorable rates.
Pros:
- You may be debt-free in just 12 months;
- You won’t have to give up all your belongings;
- Creditors can’t take any further action against you.
Cons:
- Your bankruptcy will be made public;
- You won’t be in control of your assets or finances;
- You will have to abide by a number of harsh restrictions.
Practical Tips in Addition to Your Debt Relief Program
Let’s assume you already have your credit debt reduction chosen, and you’re making some progress. The truth is you can do more. Here are some tips that can help you make changes:
- Ask for a raise. You don’t lose anything by asking, but you have something to gain. This is the easiest way to increase your income.
- Pick up a side hustle. If you have a talent or skill you can monetize, whether it’s babysitting, mowing yards, cleaning houses, or becoming a virtual assistant, it’s worth considering.
- Plan your grocery trips. Always make a list that aligns with your budget and try not to buy anything beyond that.
- Drop expensive habits. If your hobbies consistently cost you money, rethink how you can make it more affordable.
- Sell everything you don’t need. Most of us have things lying around that we rarely use and could easily live without.
- Consider becoming a one-car household. You can save thousands of dollars a year by only using one car. Also, see if taking transit, walking, cycling, or carpooling works for you.
- Use ‘found money’ well. If you receive an annual raise, an inheritance, or a bonus at work, don’t splurge. Instead, this money will be more useful in your savings account.
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What You Shouldn’t Do
At times when you feel devastated and unsure of what to do, you can potentially do even more damage. In this state, people tend to make some common mistakes that set them back in their repayments. No matter the cause of your debt – a health crisis, unemployment, or a natural disaster – please remember what not to do:
- Don’t prioritize unsecured debt (credit cards, personal loans, medical bills, and utilities) over secured one (mortgage, car loan). You don’t want to risk losing your collateral, i.e., house, car, or something equally important.
- Don’t borrow against your home equity. It can result in your home being foreclosed and making unsecured debt secures, which can’t be wiped out in bankruptcy.
- Don’t deplete your retirement funds. If you don’t keep these savings, you’ll create a complete disaster.
- Workplace retirement accounts aren’t recommended, as well. It might seem like an easy option, but you’ll be required to pay the balance within a short window of time or pay federal income taxes on it. Plus, you may end up paying taxes twice.
- Take what collectors tell you with a grain of salt. They don’t have your best interest in mind and are more likely to pressure you into something that’s advantageous to them.
Is Debt Relief for Me?
It ultimately depends on your unique situation. Our specialists will help you pick the right debt management options. There are many parameters to consider, and we’ll look at every single one to create your personal plan. Based on the amount of debt and its type, your credits score, and income, our counselors will use their skills and experience to get you’re the best deal possible.
We’ll negotiate new terms with the card companies to help you pay less than what is owed or extend the repayment schedule. In any case, it’s always a good idea to discuss your options with a debt relief agency. We’ve dealt with dozens of cases that are similar to yours, which gives us a big advantage.
Don’t hesitate and seek debt assistance from professionals in this field. While you may think that your financial situation is irredeemable, we’ll show you the way out.
Debt Settlement Is Your Start To A Debt Free Future
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