If you are struggling with debt, considering debt relief programs is one of the most common ways to help you with it.
No one wants to be in major debt and not be able to pay their loans back, but if it happens, you need to know how to save yourself from that situation.
Although debt relief programs might not save you entirely without any problems, it helps to fix the issue.
Debt relief programs are extremely popular for those looking to solve their debt problem.
It aims to help everyone, no matter if you have a couple of small debts you can’t pay, or you are under significant pressure with high debt that you failed to pay altogether.
There are several debt relief programs that people go to, and it all depends on your situation. For example, if you can’t make any payments at all, your go-to is generally bankruptcy, but you can also opt for debt management if your debts are payable according to your financial situation.
We will examine debt relief programs if you should seek to do debt relief, its cons, and what you should avoid when doing debt relief programs.
When Is The Time To choose Debt Relief?
There are certain times and financial positions when you should seek debt relief.
If you have high unsecured debts like a credit card, medical bill, or other types of loans without backed security and there is no way you can pay these debts no matter how much spending you can cut is the first reason why you should seek debt relief.
Secondly, if the total amount you owe to any unsecured debt exceeds half of your income, you should start thinking about choosing debt relief.
If your income or the cash at hand allows you to pay the unsecured loans in the short term and you think you can make it happen, it would be a suitable option to do it yourself rather than working with a company.
However, you have to be aware that debt relief might not be the most optimal solution, even if you have one of the above criteria.
The reason is that debt relief might make things worse, depending on what method you choose.
Consider The Cons Of Debt Relief
If you are sure that debt relief is a good option for your situation, you should look at the cons of debt relief before starting the process and making sure that you are okay with most of the cons associated with debt relief.
It is essential to understand that the cons we listed below do not necessarily happen all the time if you choose a program that does not entail that con or do it yourself rather than working with a debt relief company.
These are some of the most common cons of debt relief:
- You might pay hefty fees to a financial counselor or a debt relief company if you must do it through a debt relief company.
- It might crush your credit score if the debt relief company asks you to stop making payments toward your creditor to get a good deal.
- It is possible to not get the success you hoped you would get if the negotiations fail either by you or by a debt relief company.
- You might have to pay additional fees on top of your debt if you fail to make payments during negotiations which would increase the overall debt.
What Are Different Debt Relief Programs?
1. Guided Debt Management Plans
Getting debt relief through debt management works best when you work with a counseling agency that has expertise in the area.
This plan is mainly to get rid of your unsecured debts, primarily credit card debt. It aims to reduce the interest rate or discharge the entire fees and pay the debt and interest altogether without further reduction.
The way how it works is that you make only one payment to the agency you are working with, and they distribute that money to your creditors in the most suitable way.
Mainly these agencies have long-term agreements with credit card companies to help them.
However, make sure to choose an agency with accreditation from the National Foundation for Credit Counseling or the Financial Counselling Association of America.
- You make only one payment
- You don’t have to track every single of your debts
- Agency figures out which way is the best to make payments towards your debts
- Your credit score might go down because you close your credit card accounts
- You can’t use credit cards until you complete your payments.
- You might pay high fees
2. Using Debt Settlement
Debt settlement is the bad version of declaring bankruptcy. In most cases, people are advised to declare bankruptcy if they can or find another solution.
Debt settlement1 is the last resort if both bankruptcy and other options are not a possibility.
You have the option to work with a debt settlement company or do it yourself, but it works better when you work with a debt settlement company.
The main aim of a debt settlement company is to stop making payments towards your debt for some time and approach your creditors and offer them an agreement where you will pay small lump-sum cash.
However, when you decide to go with a debt settlement company, you have to be extra cautious because it is an extremely dangerous tactic and has to be done correctly.
Even the Consumer Financial Protection Bureau and other similar governmental organizations make announcements for consumers to be careful.
- You get rid of your debt in one go with a lump-sum payment
- You can set the deal on your own terms
- Your credit score will crush
- You might face penalty fees or legal actions because of missing payments
- Offers start after at least six months
3. Choose Bankruptcy
Bankruptcy is generally the last resort people go for when they are sure they can’t make any payments towards any debts, even with an agreement to waive interest fees or with a better repayment schedule like in a debt management plan or other debt relief programs.
There are different types of bankruptcy that you can opt for depending on your situation. The most common one is Chapter 7 bankruptcy, also known as liquidation.
It helps to discharge most unsecured debts in a minimum of three months2. You will lose everything you have under your name until your debts are paid off, and the remaining debts are discharged when you have nothing to liquidate.
However, not everyone qualifies for Chapter 7 bankruptcy.
The other bankruptcy type is Chapter 13. You get a three-to-five-year repayment plan where the court approves this plan.
To quality for chapter 13, you must have income above the median salary for the state you live in, or there is a house you want to keep.
You make payments in the agreed time zone, and if you stick with it, the remaining debts get discharged. However, not everyone actually keeps up with this plan.
- It helps to eliminate all of your debts in most cases
- An easy solution to get rid of the debts you can’t possibly pay back
- Depending on the type, it stays on your credit report for seven to ten years
- It crushes your credit score
- Chapter 13 takes at least three years to finish
4. The Do It Yourself Debt Relief Program
One of the most available methods in debt relief programs is the do-it-yourself method.
You can for sure talk to your creditor, apply for a 0% balance transfer card yourself, create a debt management plan, and many more other things without help from an agency.
However, you need to do deep research about the methods and how they work and find out what really works for you with your research.
You might end up doing the wrong method, which would give you more harm than help.
The do-it-yourself method works best when you are not at the bottom of your finances and have a good credit score, and have the option to keep making payments towards your debt for some time if your efforts fail to bring any success.
- You don’t pay any fees to any agency
- It might get everything done quicker
- Your credit score might not have as much effect as it does while working with an agency.
- There is a need to spend a lot of time understanding debt relief deeply
- You might do something wrong which could hurt your credit score
- You could choose the wrong program, which would not give you success, but you will lose time and possibly money.
5. Debt Consolidation
In a debt consolidation program, all your debts are clubbed for a single monthly payment. So instead of paying a high-interest rate to multiple creditors, you only make one payment that too with a less interest rate.
Debt Consolidation is a great option for those who owe money to more than two creditors and want to avoid paying high-interest rates or for those who may accidentally skip making their monthly payments ruining their credit score.
- It can improve your credit score
- You can save a lot of money due to lesser interest rates than before
- Keeping track of payments will be much easier
- You can debt-free sooner
- Debt Consolidation programs come with upfront fees
- A longer repayment period will make you end up paying more money
- Missed payments will give set you back even more
- Not ideal for those who owe a small amount of money
6. Deferment And Forbearance
If, for any temporary reason, you are unable to make your monthly payments, you can choose to go with a Deferment or Forbearance plan:
- In a Deferment, you can stop making payments temporarily.
- And in a Forbearance, you can either reduce your payments or stop making payments for upto twelve months.
Once the Forbearance of Deferment time period is over, you will be required to pay the missed payments.
- It can help you in avoiding foreclosures
- It will not impact your credit score if you follow the terms of your foreclosure or deferment program
- Can help you in times of unexpected financial hardships
- You will still have to pay accrued interest and payments after the period is over
- You might have to pay high-interest rate after the foreclosure or deferment period is over
In a refinancing option, you simply take another loan with a lesser interest rate and use that money to pay back your existing loan.
Refinancing can not only lower your interest rates but can also lower your monthly payments making it easier to repay your debts. This option is best for student loans or auto loans.
- Helps in improving your credit score
- Great option for student debt
- Helps you in repaying your loan faster
- You can save a lot on interest
- You may have to pay closing cost
- Might reduce your home equity
- Savings may be minimal
8. Balance Transfers
In a balance transfer, you simply transfer your existing loan or credit card loan to a new account or credit card having a lesser interest rate.
You will still be required to pay your debt, but because of the lower interest rate, you will end up saving more.
- Can also positively impact your credit score
- Can save a lot of money on interest
- Can help you in consolidating payments
- Hard credit inquiry might affect your credit score a little
- You might be required to pay a balance transfer fee
What Should You Avoid When Choosing A Debt Relief Program?
It is possible that you might be late in choosing to work out a way to get rid of your overwhelming debt, or you might accrue high debt in a short amount of time, and you might be quickly looking for options to solve it.
While trying to do debt relief to help with your debt, you must avoid certain things because debt relief programs might hurt your financial records3 if you don’t avoid the dangerous things.
- Never go with a debt relief company without taking a look at their fees and reviews online and making sure they have some accreditation from a governmental organization.
- Do not be late with a secured payment just to put priority on unsecured debt. You might lose your collateral if you fail to make payments to secured debt.
- Don’t consider using your retirement savings to pay for unsecured debt.
- Do not rush into choosing a debt relief program. Understand your options well, see what is on the table, and make the best decision possible.
Do I always have to work with a debt relief company in order to be successful with debt relief?
As we mentioned above, there is always the option to do it yourself when considering debt relief, but there are associated risks, and one of them is the chances of success.
You might get less success if you decide to do it yourself because experts might get you better advice on which debt relief program to choose and how to do it properly.
Can I get rid of debt with other methods than debt relief programs?
There are many different ways to get rid of your debt, whether secured or unsecured, but debt relief programs are the most common and mostly the easiest way to find a way to make your debt payment easier or discharge them altogether.
Is there an average completion time for debt relief programs?
No, there are different times to achieve your results depending on what kind of debt relief program you want to do.
For example, chapter 13 bankruptcy could last up to 5 years, or debt settlement could take somewhere around six months to complete. It is all about the type of debt relief.
Do all debt relief programs affect my credit score?
Not necessarily, because if you do some of the debt relief programs accordingly, you will not have any effects or at least long-term effects on your credit score.
However, some programs like bankruptcy will most certainly affect your credit score for a long time.
Are there governmental organizations that oversee companies that do debt relief programs?
There are governmental organizations that give accreditation to companies, but they do not actively oversee all of their activities with their clients unless there is a complaint against them about their services or how they work.
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.
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