We all struggle with financial burdens from time to time. You may feel overwhelmed by the bills, utilities, and other obligatory expenses you must pay every month.
However, stacked credit card and loan payments stop everything and sometimes feel insurmountable.
In such cases, seeking debt relief can be an excellent option to lighten the load.
However, not all debt relief programs apply to everyone’s situation, and you must be aware of the consequences that come along with it.
Finding the right debt relief program is vital to ease your financial burden and quickly get back on your feet.
In this article, we’ll be discussing everything you need to know about debt relief programs.
Let’s dive right in!
- Debt relief programs combine your debts into a more manageable payment with a lesser interest rate.
- The debt relief program is valid for both secured and unsecured loans.
- The IRS considers the money forgiven by creditors as taxable income.
- You can get debt free in 2-5 years by opting for the debt relief option.
What is Debt Relief?
Debt relief refers to strategies used to make your Debt easier to manage.
It typically involves changing the terms of your debt agreement or exploring workable options to have your debts reduced or forgiven.
Debt relief programs typically combine your debts into a more manageable payment, change your interest rate or payment schedule, or persuade creditors to accept less than the original amount owed.
What Types of Debts Qualify for the Debt Relief Programs?
There are two types of debts that qualify for debt relief programs; Secured Debt or Unsecured Debt:
- Secured Debt
Secured Debt is tied to any tangible asset such as vehicle debt or mortgage loan.
The failure to make payment on time will give creditors a legal right to seize that asset to secure the payment.
- Unsecured Debt
Secured Debt is any debt tied to any tangible asset, such as a personal loan, private student loan, or credit card debt.
If you miss any payment, the creditors will not be able to secure the payment so slickly, and this high level of risk is the main reason why unsecured debts carry higher interest rates.
How Do Debt Relief Companies Work?
Debt relief companies help clients settle their financial woes through negotiations with their creditors.
They usually persuade the creditors to accept less than what they owed, arguing that the borrower cannot repay the whole amount.
When you sign an agreement with a debt relief company, the first thing they’ll ask you to do is to stop making payments to your creditor and make monthly payments to their account instead. When there’s sufficient money in your account, they will negotiate with your creditor and offer a settlement.
Though this strategy might work well for some people, in some cases, creditors refuse to settle, may file a debt collection lawsuit against you, or sell your accounts to debt collection agencies, and your problems will grow.
Even if they agree to partial payments, you might face tax problems. The IRS considers the money forgiven by creditors as taxable income.
When Should You and Should not Seek Debt Relief?
While seeking debt relief can help you get your finances under control, there may be some cons to weight in the balance.
Debt relief can take many different forms depending on how much you owe and the type of interest you are paying.
You may seek debt relief if:
- You are unable to pay your credit card bills and loan payments.
- You can pay the bills but struggle to afford the payments.
- You have tried your best to handle your Debt on your own, but it doesn’t seem to work out.
- You have considered filing for bankruptcy.
Debt relief might not be the right option for you if:
- You keep on creating new debts to add to your debt balances
- You are not serious about making long-term commitments to repay your Debt.
What are Some Major Debt Relief Options?
When looking for a debt relief company, it is crucial to consider both good and bad aspects and understand what the consequences might be to make a more informed decision.
Keep in mind that what works well for some people may be a disaster for others.
So always get a debt relief program that works for your specific circumstances.
Here is a closer look at the five main debt relief options you can choose from:
- Debt Consolidation
I have multiple loans or lines of credit to repay, and debt consolidation is the best option for you.
It combines several debts into a single loan to make it easy to repay.
Consolidation debt means that you’ll only have to make a single monthly payment rather than paying multiple creditors.
You may either take out a personal loan or open a new credit card account for a balance transfer.
Credit counseling can be a great option to get a complete picture of your finances and a personalized debt repayment plan.
It involves a credit counseling agency, most often a non-profitable that offers a financial education by licensed and personal finance counselors.
They analyze your situation and give you tips on how you can handle basic budgeting issues, improve your credit score and start paying off your debts, including the possibility of enrolling in a debt management plan.
- Debt Management Plan
A debt management plan allows you to consolidate all your payments and make just a single monthly payment that covers all your unsecured debts included in the plan.
The payment is then distributed among your creditors according to the plan’s terms.
However, don’t take it as a loan as it won’t reduce the amount you owe in the first place, but only simplify the repayment process and minimize the time you’ll need to be debt-free.
- Debt Settlement
It is one of the cheapest ways to get out of your Debt.
When you enter a debt settlement contract with the company, you will begin making payments to the company instead of your creditors, which will go into an escrow account.
Meanwhile, the company will directly negotiate the debt terms with your creditors to settle for a lesser amount.
Once you pay the amount written in the agreement, the debt settlement company will start paying your creditors, which may take around 2-3 years.
Bankruptcy also fell under the debt relief umbrella. Still, there are some grave long-term impacts associated with filing bankruptcy, so it is often called a “nuclear option” that should only be used as a last resort.
Bankruptcy can help reduce or eliminate your loan in dire financial situations and temporarily prevents creditors from foreclosing on a home or repossessing a car.
However, it will hurt your credit score for up to 7-10 years, making it difficult to obtain a car loan or mortgage after bankruptcy.
How Long Does Debt Relief Take to Work?
The time it takes to make you entirely debt-free depends on several factors as follows:
- The amount of money you owe
- The debt relief program you have selected
- The degree to which you follow the program you have chosen
Typically, it may take approximately 2-5 years to become completely debt-free.
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.