Wondering how debt relief works? What do debt relief companies do? We got you!
Regardless of good or bad debt, borrowing money and being on your toes to repay it in the future can be overwhelming, especially when it seems like you won’t be able to pay it on time.
If you are also facing a similar situation and feeling overwhelmed by your high-interest debt and thinking about how to deal with it, a debt relief company can be an excellent option to manage your debt and get your finances back on track.
However, finding the right type of debt relief program is quite important and can be a great step towards regaining control of your finances.
In this article, we’ll be looking at how Debt relief works and explore various options to have your debts reduced or forgiven. Let’s get started!
What is Debt Relief?
Debt relief involves consolidating your debts into more manageable monthly payments, reduction of the total amount you owe, or replacing your debt with a new loan with different terms.
Debt relief companies provide consumers with a workable way out of their financial problems and help get rid of the stress, anxiety, and chaos they experience with overwhelming debt.
However, it is a long-term solution designed to help you become debt-free over some time, usually several years.
Once you successfully find the right type of debt relief plan, it will help you erase your debt and rebuild your credit.
Note: Both Debt Settlement and Debt Consolidation can damage your credit.
How Does the Debt Relief Work?
Debt relief is a way to decrease or refinance your debt to help make your payments more affordable so you can ultimately become debt-free.
There are many different types of debt relief, but just like no one-size-fits-all, not all programs are suitable for everyone, and some of the options may be a better or worse fit for your specific situation.
Some types of debt relief converge several debts into one, while certain types involve a lender forgiving a part of the debt.
Most companies and consumers turn to debt relief programs to avoid the risk of getting bankrupt.
Debt relief companies and organizations specialize in handling clients with manageable debt issues.
They review your finances, inspect your debt, help you with financial management and settle matters with your creditors to create a debt repayment plan that fits your unique situation and resources.
Types of Debt Relief
Debt relief has five major types based on several factors, including timeframe, amount of debt you owe, interest rates, and your overall credit.
We’d recommend going with the solution that best fits your needs. Here is an in-depth look at the common types of debt relief:
- Debt Consolidation
Debt Consolidation is a financial strategy that helps consumers pay off a debt especially a credit card debt in one go by taking one big loan.
It gathers all your unsecured debts and merges them into a single debt at a lower interest rate.
The money from a consolidation loan or balance transfer is used to pay off your existing account balances, and now you have to make only a single monthly payment instead of multiple payments to credit card companies.
- Credit Counseling
Credit Counselors1 typically provide consumers with guidance on money management, debt management, and budgeting and help them take control of their financial lives.
A trained credit counselor thoroughly evaluates your financial situation and then makes a personalized debt management plan to suit your needs to help you solve your money problems and eliminate your debts.
Credit Counseling can help with managing money, reviewing your credit report, making budgets, using credit to your advantage, and designing a custom debt management plan.
- Debt Management
Debt management is one of the best ways to lower your current debt by keeping your bills under control through effective planning and budgeting.
The main goal of a debt management plan is to address unsecured debt like personal loans and credit cards and move towards eliminating them forever.
You can either create your Debt management plan yourself or ask a credit counselor to suggest a plan to repay your debt.
- Debt Settlement
The Debt Settlement, also known as a “Debt adjustment” is a financial strategy for improving the personal debt load.
Debt settlement companies negotiate with your creditors and settle your debt for less than what you currently owe.
If your creditor agrees, you’ll have to make regular payments to the debt settlement company into an account the company can use to make payments on your debt or collect fees you owe them.
While debt settlement seems like an excellent option, it can be risky.
- Debt Forgiveness
Debt Forgiveness happens when a lender or creditor forgives all or a portion of the debt that you owe.
If you are having difficulty in making your payments, you can apply for a debt forgiveness program directly with your lender or get help from a debt settlement company to negotiate and resolve your debt.
Whether or not you will be qualified for the debt forgiveness program can vary depending on the type of your debt.
Read: Our Detailed Debt Relief Review Methodology
Things to Consider Before Applying
While debt relief seems like the only option to cope with your debt and make repayment more manageable, there are some things you need to know before opting for debt relief as a situation:
- Interest Rates
If you are interested in a debt consolidation loan, always compare loan offers from multiple lenders with the interest you pay on your existing accounts.
If your new loan has a higher interest rate, it doesn’t make sense to take out a new loan.
Always pay attention to the fees while choosing a debt relief solution. Debt settlement services usually charge 15% to 20% of your total debt.
Credit counseling agencies typically offer most services free of cost, but if you enroll in a monthly debt management program, you’ll be charged a monthly fee.
Many debt relief options including debt settlement, credit counseling, and debt forgiveness come with a high risk of scams.
If a debt relief company refuses to give free information about its services, demands upfront payment, or claims to settle your debt for a fraction of what you owe, it undoubtedly indicates a possible scam.
- Tax Implications
If you negotiate with your lender to settle your debts for less than what you owe, the amount you save will be considered a taxable income.
Once your debts are settled, you are obliged to pay taxes on them. So, keep that in mind while considering your options.
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.
The National Planning Cycles is committed to producing high-quality content that follows industry standards. We do this by using primary sources, such as white papers and government data alongside original reporting from reputable publishers that were appropriate for the accuracy of information while still being unbiased. We have an editorial policy that includes verifiable facts with due credit given where applicable.