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. 1
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. 2
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Debt Relief Program – Has anyone done it or successful at it?
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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. 3
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.
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:
1. 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.
2. Credit Counseling
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.
3. 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.
4. 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.
Read: Difference Between Debt Settlement And Debt Consolidation
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.
6. 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.
7. Balance Transfer
Some credit card companies offer promotional offers such as low or zero-interest APR for a limited time period.
If you have good credit, then you get your existing credit card balances transferred to this new card.
This will allow you to pay your debt faster because of the zero or no interest rate for some time. Just be aware of the limited time period and balance transfer fees. 3
Read Our Detailed Debt Relief Review Methodology
Debt Relief Qualification Criteria
Different debt relief options have different qualification criteria. Depending on the type of debt relief option you choose, you may have to meet one or more of the following requirements:
- Income: Some debt relief options take into account your income to qualify, such as bankruptcy.
- Credit score: Options like a credit balance transfer or consolidation loan requires you to have a good credit score.
- Your debt amount: If you choose to go for debt settlement or debt management plan, etc., via a credit counseling agency, then you may need to have a certain amount of debt to be eligible. For example, National debt relief requires you to have at least $7,500 of unsecured debt to be eligible.
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. 4
Debt relief can be really helpful for those in dire financial circumstances.
And the fact that there are so many debt relief methods available gives you the power to choose the one that suits you the most.
In this article on what is debt relief, we shared all the necessary information with you, and we hope you found this useful.
Does debt relief affect your credit?
Debt relief may or may not have a severe effect on your credit score. It all depends on which debt relief option you choose and what is your credit score.
For example, Debt settlement can damage your credit score, a debt management plan will have minimal effect on your credit score, and credit counseling does not affect your credit at all. 5
Is forgiven debt taxable?
Yes, if you have been forgiven more than $600 in debt, then it will be considered as taxable income.
How long does debt relief take?
The amount of time a debt relief option may take depends on the kind of debt relief option you have chosen, along with the amount of debt you owe and your capacity to make a payment towards it.
For example, debt settlement may take 2-3 years, bankruptcy may take two years, credit transfer may take 1-2 years, and so on.
Traci is a highly experienced debt resolution expert with over 8 years of expertise in helping people become debt-free through various debt relief programs. As a former employee of a well-known debt relief company, she possesses exceptional knowledge and skills to take care of debt-related issues.
When not writing about debt, Traci can be found conducting in-depth research on the latest developments in the industry to ensure that she stays up-to-date with the latest trends and strategies.
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