Debt is easy to accumulate, but finding a way out may seem practically impossible. That’s where debt relief comes in – there are several programs to choose from if you haven’t had much luck making a dent in those pesky balances on your own.
This guide explores various options, the pros and cons of each, and how to decide which is best for you.
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Reduce Unsecured Debts Such As Credit Cards, Loans, or Bills. Regain Control of Your Finances. Talk with a Certified Debt Specialist.
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What is a Debt Relief Program?
As the name implies, a debt relief program is designed to help you manage your debt more effectively. Several forms of relief are available, including debt consolidation, debt settlement, debt management plans, debt forgiveness, credit counseling, and, in more serious cases, bankruptcy. More on the specifics of each shortly.
Understanding How Debt Relief Programs Work
Again, debt relief programs exist to streamline the debt repayment process. Or you can use it to reduce what you owe to reach the finish line faster. The ways in which each program works depend on the option you select.
Overview of Debt Relief Programs
Below is an overview of debt relief programs and what to expect when you sign.
Debt Consolidation
Debt consolidation involves using a single loan or credit card product, preferably with a lower interest rate or better terms than you currently have, to pay off multiple balances. This means you’ll pay a single creditor instead of several each month, simplifying the repayment process. You could also save a bundle in interest by consolidating high-interest debts.
Debt Settlement
You can settle your debts on your own or hire someone to do it for you. If you choose the latter, you will hire a debt settlement company to handle negotiations on your behalf. But before they can start, you must make an agreed-upon monthly payment into a dedicated savings account. Once it reaches a certain balance, negotiations will begin in an effort to reach settlement offers for less than what you owe.
Settlement payments are made from the dedicated savings account if you agree with the offer to resolve the balance(s). The debt settlement company also withdraws a percentage of the total balance owed to compensate for its services.
Debt Management Plan
Credit counseling agencies offer debt management plans (DMPs). The process starts with a credit counselor’s review of your debt load and finances, who will then recommend a DMP if it seems ideal for your situation.
When you enroll, the credit counselor will negotiate with your creditors to get reduced monthly payments, lower interest rates, fee waivers or other concessions. In the meantime, you will make a single monthly payment to the agency, and they will pay creditors directly in accordance with the agreed-upon repayment schedule. And there’s typically a monthly fee assessed while you’re enrolled in a DMP.
America’s Leader in Credit Card Debt Relief and Debt Consolidation since 2002. Over 850,000 Clients and $18 Billion in Debt Resolved.
Reduce Unsecured Debts Such As Credit Cards, Loans, or Bills. Regain Control of Your Finances. Talk with a Certified Debt Specialist.
Debt Consolidation Loan Options. Talk to a Certified Debt Counselor to Help You Achieve Financial Freedom Faster. Apply for a Quote.
Debt Forgiveness
Debt forgiveness erases a portion or all of your debt through a formal agreement. It’s relatively common when lenders and creditors agree to settlement offers. Federal student loans may also be eligible for forgiveness if you meet the strict eligibility guidelines. Keep in mind that any amount of forgiven debt exceeding $600 must be included as taxable income when you file your return.
Credit Counseling
Credit counseling is typically offered free of charge by non-profit credit counseling organizations. You’ll meet with a counselor who can offer guidance in managing your debt and improving your overall financial situation. As previously mentioned, the credit counselor may suggest a DMP to get a handle on your balances.
Bankruptcy
Bankruptcy should only be filed if you’ve exhausted all other debt-relief options. The two most common types of bankruptcy filings are Chapter 7 (also known as liquidation) and Chapter 13 (or reorganization). Chapter 7 essentially gives you a clean slate if you meet the stringent requirements, while Chapter 13 is a repayment plan that spans three to five years.
Consult with a bankruptcy attorney before filing to determine if this course of action is right for you.
Debt Relief Program Pros and Cons: Debt Consolidation
Pros
- Lower interest rates and borrowing costs: A debt consolidation loan could mean a lower interest rate and reduced borrowing costs, especially if you have good or excellent credit. If you get a balance transfer credit card, you’ll enjoy no interest for an introductory period – typically between 12 and 18 months.
- Streamlined repayment process: You won’t have to keep up with due dates for each creditor or lender each month. Instead, you’ll remit a single monthly payment, which makes the repayment process more manageable.
- Predictability: Credit cards have variable interest rates that fluctuate with market conditions. However, debt consolidation loans typically offer fixed interest rates, giving you set monthly payments over a fixed period of time. So you’ll know the exact debt payoff date.
- Long-term credit impact: Once the balances are wiped out, your credit utilization rate, which accounts for 30 percent of your credit score, will decrease. This means consolidating could increase your credit score.
America’s Leader in Credit Card Debt Relief and Debt Consolidation since 2002. Over 850,000 Clients and $18 Billion in Debt Resolved.
Reduce Unsecured Debts Such As Credit Cards, Loans, or Bills. Regain Control of Your Finances. Talk with a Certified Debt Specialist.
Debt Consolidation Loan Options. Talk to a Certified Debt Counselor to Help You Achieve Financial Freedom Faster. Apply for a Quote.
Cons
- Fees: Debt consolidation loans often come with origination fees. And if you opt for a balance transfer card, you’ll typically pay a balance transfer fee and an annual fee in some instances.
- Risk of debt entrapment: If you consolidate your debt but continue using your credit cards, you could have a larger debt load. Unfortunately, it also means you’ll be even more entrapped by debt.
- Initial credit impact: Although consolidating could help your credit score over time, it’s worth noting that you could see a slight dip when you apply for a loan or credit card. This is due to the hard credit inquiry generated so the lender or creditor can review your credit profile and make a lending decision.
Debt Relief Program Pros and Cons: Debt Settlement
Pros
- Reduced debt load: You may be able to resolve your balances for less than what you owe, often with a lump-sum payment.
- Faster resolution: Most debt settlement programs are designed to get you out of debt in three to five years. But handling your debts on your own could mean a decade or more of minimum monthly payments.
- Financial stability: You will work with the debt settlement company to come up with an amount you can afford to contribute monthly to the dedicated savings account. Doing so allows you to free up income for other household expenses.
Cons
- Costs: You won’t pay a fee to sign up with a debt settlement company. However, they generally charge a fee each time a debt is settled.
- No guarantees: Creditors aren’t obligated to accept settlement offers. You could end up with added fees and interest far exceeding what you started with. Or the creditor may choose to sue you for the outstanding balance.
- Credit impact: Settled accounts are marked as such on your credit report, potentially adding to the damage already caused by the existing late payment marks.
America’s Leader in Credit Card Debt Relief and Debt Consolidation since 2002. Over 850,000 Clients and $18 Billion in Debt Resolved.
Reduce Unsecured Debts Such As Credit Cards, Loans, or Bills. Regain Control of Your Finances. Talk with a Certified Debt Specialist.
Debt Consolidation Loan Options. Talk to a Certified Debt Counselor to Help You Achieve Financial Freedom Faster. Apply for a Quote.
Debt Relief Program Pros and Cons: Debt Management Plan
Pros
- Simplified payment structure: Enrolling in a DMP means you’ll get one monthly payment. And you’ll pay it to the credit counseling agency directly instead of remitting payments to multiple creditors and lenders monthly.
- Cost savings: If the credit counselor successfully negotiates concessions, you could save a bundle in interest and fees while repaying what you owe faster.
- Credit improvement: A DMP helps you get back on track with monthly debt payments. If you’ve been behind for some time and late payments are reflected on your credit report, getting current will help improve your payment history.
Cons
- Enrollment fees: You’ll generally pay an upfront fee to enroll in a DMP. There are also monthly service fees while you participate in the program.
- Access to credit: A major drawback is closing your credit card accounts when you sign up for a DMP. It’s required, and your credit score could take a slight hit. Plus, you won’t have access to credit if you need it in the short term.
- Long-term commitment: DMPs take some time to complete. They’re not an overnight plan offering a quick fix, so you’ll need to commit to the long haul to get the desired results.
Debt Relief Program Pros and Cons: Debt Forgiveness
Pros
- Significantly reduce debt: This tactic can eliminate a sizable portion of your debt and alleviate financial pressure, which is a major plus if you’re struggling to make ends meet.
- Improve financial health: Less debt means more disposable income to meet your needs. You can also use the funds to work towards other pressing financial goals, like building an emergency fund.
- Avoid bankruptcy: You won’t have to file for bankruptcy if your efforts to get your debt forgiven are successful.
Cons
- Tax implications: Any amount over $600 that’s forgiven must be included in your tax return, potentially resulting in federal income tax owed.
- Potential for abuse: Debt forgiveness could encourage irresponsible borrowing behaviors, as some may be inclined to take on more debt in the future with the expectation of being eligible for forgiveness if they cannot pay.
- Credit impact: Credit accounts reported as settled for less than the full balance could mean bad news for your credit score.
America’s Leader in Credit Card Debt Relief and Debt Consolidation since 2002. Over 850,000 Clients and $18 Billion in Debt Resolved.
Reduce Unsecured Debts Such As Credit Cards, Loans, or Bills. Regain Control of Your Finances. Talk with a Certified Debt Specialist.
Debt Consolidation Loan Options. Talk to a Certified Debt Counselor to Help You Achieve Financial Freedom Faster. Apply for a Quote.
Debt Relief Program Pros and Cons: Credit Counseling
Pros
- Tailored solutions: Credit counselors assess your situation to provide customized recommendations or tailored solutions, like DMPs.
- Lower borrowing costs: You could receive guidance on minimizing your interest costs.
- Accessible for free: Most credit counseling agencies offer advice free of charge.
Cons
- Does not erase debt: Working with a credit counselor does not make your debt magically disappear.
- Service fees: If you sign up for a DMP, you’ll incur enrollment and monthly service fees.
Debt Relief Program Pros and Cons: Bankruptcy
Pros
- Automatic stay: Filing for bankruptcy puts an automatic stay in place. This prevents creditors from taking further action against you, such as lawsuits, wage garnishments or collection calls.
- Legal protection: During bankruptcy, you have legal protection from creditors. This can reduce stress and give you time to reorganize your finances.
- Discharge of unsecured debts: Bankruptcy can help you eliminate or reduce unsecured debts such as credit card debt and medical bills. This can provide significant relief and a fresh financial start.
- Manageable repayment plan: If you don’t qualify for discharge of unsecured debts under Chapter 7, the repayment plan offered through Chapter 13 could still be viable to get relief from overwhelming debt.
Cons
- Credit damage: Bankruptcy has a severe impact on your credit score. It will stay on your credit report for up to 10 years, affecting your ability to obtain new credit, loans, or even housing.
- Filing costs: Filing for bankruptcy can be expensive, including court fees, attorney fees and required credit counseling sessions. These costs can add up, making the process financially challenging for some.
- Potential asset loss: Depending on the type of bankruptcy, you might have to sell some assets to repay your debts. This can include valuable property or other personal belongings.
How to Choose the Right Debt Relief Program for You
You deserve to break the chains of debt bondage, but it’s important to carefully weigh each option to choose the best fit for you. Here’s how to make an informed decision.
America’s Leader in Credit Card Debt Relief and Debt Consolidation since 2002. Over 850,000 Clients and $18 Billion in Debt Resolved.
Reduce Unsecured Debts Such As Credit Cards, Loans, or Bills. Regain Control of Your Finances. Talk with a Certified Debt Specialist.
Debt Consolidation Loan Options. Talk to a Certified Debt Counselor to Help You Achieve Financial Freedom Faster. Apply for a Quote.
Consider Your Financial Situation
Start by closely examining your finances. Jot down all your debt balances, monthly payment amounts and interest rates. Also, make a note of how much money you have available each month to allocate toward debt payments. And if you need to rework your budget to come up with a concrete figure, now’s the time to do so.
Understanding your financial situation means you’ll have the information you need to select a debt relief option that works for your spending plan.
Research and Compare Different Programs
If you haven’t already done so, familiarize yourself with each debt relief program and what it offers. Take note of the costs, key benefits, and drawbacks of the programs at the top of your list.
Once you’ve decided which route to take, the next step is to scope lenders or organizations offering the products or services you want to patronize. Do your research to ensure they’re reputable and licensed to operate in your state. It’s also worth exploring reviews from past and current borrowers or clients so you’ll know what to expect.
Check If You Qualify
Debt relief programs generally have minimum eligibility requirements. If you’re considering a debt consolidation loan or credit card, navigate to the lender or creditor’s website and complete the online form to get pre-qualified (if applicable).
Otherwise, you must contact the credit counseling agency or debt settlement companies you’re considering to get the specifics on what you need to qualify. And if you’re leaning towards bankruptcy, an attorney can discuss the guidelines for bankruptcy filings.
Assess Its Short and Long-term Impacts
Most importantly, evaluate how each program will affect your credit and overall financial health in the short- and long-term. Debt consolidation and DMPs could actually boost your score over time, while you likely won’t be as lucky with the other options.
America’s Leader in Credit Card Debt Relief and Debt Consolidation since 2002. Over 850,000 Clients and $18 Billion in Debt Resolved.
Reduce Unsecured Debts Such As Credit Cards, Loans, or Bills. Regain Control of Your Finances. Talk with a Certified Debt Specialist.
Debt Consolidation Loan Options. Talk to a Certified Debt Counselor to Help You Achieve Financial Freedom Faster. Apply for a Quote.
Consult a Professional
It’s best to speak with a financial advisor or credit counselor before making a final decision. Again, they can provide personalized advice to help you make an informed decision.
Conclusion: Making an Informed Decision to Manage Debt
You may still have options if you haven’t had much luck resolving your debts. Explore debt relief programs in depth, evaluate the pros and cons, and analyze your financial situation to find the best fit.
