The Truth About Debt Relief and When to Seek It

Are you overwhelmed by credit cards bills, student loans payments or other debts. Looking for debt relief may help you manage your financial obligations.

You can get debt relief in many different ways. One may be better than the next. While debt relief can provide some advantages, there could be disadvantages.

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What is Debt Relief and How Can It Help?

There are many ways to make debt less burdensome. It all depends on the type of debts that you have and what help you need.

Credit card debt relief may be necessary if you have difficulty paying your credit card bill. If you have multiple debts to pay off, debt consolidation may be an option.

Under the umbrella of debt relief, credit counseling, debt management programs and debt settlement all fall under this umbrella. While the methods may vary, the ultimate goal is the same. Debt relief is about finding a path that works for you to get rid of your debt.

How does Debt Relief work?

You can get debt relief by making it simpler to reduce your burden. First, recognize that you require help with managing your debts. The next step is to select a debt relief program.

There are many options available for debt relief.

  • Sensible interest rate cuts
  • Changes in credit card or loan terms
  • Reduce the principal amount due
  • Consolidating debt
  • Refinance your loan

Bankruptcy is also a method of debt relief. Filing bankruptcy can lead to significant credit score changes.

It’s important that you consider both the positive and the negative aspects when comparing various debt relief options.

The Reasons You Shouldn’t Seek Debt Relief

There may not be a solution for everyone. Before diving into the options, it helps to understand who debt relief works best for.

You may consider debt relief if:

  • You’re behind in your credit card or loan payments.
  • Although you don’t owe any bills, you are still unable to afford your payments.
  • You’ve tried to manage the debt yourself but it’s not working.
  • You may have thought of filing bankruptcy.

If:

  • You continue to increase your debt balances.
  • You’re not looking to make a long term commitment to repaying debt.

If you have a history of creating new debt, it may not suffice to get debt relief. You might also need to address your spending habits that keep you in debt.

Debt relief options

Debt relief is not a one-size fits all solution. There are many ways to approach this matter, depending on how much debt you have and what kind of interest rates your paying.

Here are four options that can be used to reduce debt.

Consolidation of Debt

If you have multiple lines of credit or loans to repay, consolidation may be an option. But what is debt consolidating and how does it work.

In simple words, debt consolidation refers to combining multiple debts in one. A personal loan may be used to consolidate multiple debts from credit cards.

For credit card debt relief, balance transfers can be another option. In this scenario, you would open a credit card account at a low, or 0% annual rate and then transfer your balances to the card.

Consolidating debt means only one monthly payment. This may or may not result in a savings on interest. It is also important to know the pros and disadvantages of debt consolidation.

Credit Counseling

Credit counseling involves meeting up with a counselor to discuss finances, your budget and debt. A credit counselor can help you manage your finances by reviewing your spending and debts.

If you only need assistance in creating a plan for debt repayment, a credit counsellor could be right for you. A credit counselor might also be able help you to understand the basics of budgeting that could have resulted in excessive debt.

Many non-profit credit counseling agencies offer their services for free.

It is a good idea for credit counselors to check the status of their certification with the National Foundation for Credit Counseling and/or the Financial Counseling Association of America.

Plans for debt management

If you are working with a credit counsellor or a program to reduce your debt, a possible suggestion they might make is a “debt management plan”. A debt management program, also known as DMP, is like this:

  • You decide which debts will be included in the program.
  • Each month, you pay one payment to your debt management plan.
  • According to the terms of your plan, this payment is divided among your creditors.

A debt management plan is similar to consolidating debt. You only have one payment. You don’t have to take out loans or open balance transfer credit cards in order to benefit from this debt relief program. Depending on the program, your interest rates may be reduced or fees waived.

The terms of a debt management agreement will give you more favorable interest rates and fees relief, but you still need to repay the principal amount.

Debt Settlement

As a last resort, debt settlement is an option. It allows you the option to settle your debts for less than what is owed. If you agree to a settlement of your debt, the remaining balance is cancelled.

Since you don’t have the obligation to repay any additional amount, this is effectively a form debt forgiveness. If you have the funds to pay your creditors and feel comfortable negotiating one-on one, then debt settlement can be done by yourself.

There are debt relief companies who will negotiate on your behalf. This typically means you have to pay a fee to the company to help you with your loan relief or credit cards debt relief.

Don’t forget that creditors typically require you to have a past due balance before they will settle your debt. The cost of debt settlement may be higher than other options to reduce debt.

You might be asked to pay a separate account by a debt settlement agency, instead of your individual creditors. This will result in you being late with your creditors for a certain period, which can adversely affect your credit.

You may also face income tax issues when you settle debt, whether through a firm or yourself. This is because the amount of debt forgiven can be considered taxable.

What you need to know before applying for debt relief

The best way to get out of debt is through debt relief programs. This is a hard decision that must be taken carefully. It’s not always the right solution. There might be serious compromises.

Three important points to keep in mind before you begin your debt relief efforts.

Interest

You can get credit card debt relief by taking out consolidation loans or lines. Be aware of the potential costs.

Consolidating debt can result in a lower Interest Rate. A lower APR means that your monthly payment will go towards the principal. This allows you to pay off your debt more quickly. There is also less interest accrued over the term of your repayment.

You may be interested in consolidating your debt. First, you should consider what rates you may be eligible for based upon your credit score. You may also be interested in a debt management plan. Ask whether a reduction in interest rate is possible as you work out your repayment terms.

Fees

When deciding whether to spend the money on debt relief, it’s worth considering any fees.

Credit counselors may charge a fee, or not, to help you make a budget and spend plan. Prepayment penalties and loan origination costs are two things to be aware of when taking out debt consolidation loans. A balance transfer fee may be charged if you consolidate debt with a 0% interest balance transfer creditcard.

You may need to pay a monthly fee to join a debt management plan. A fee may also be charged by companies who negotiate debt settlement, often up to 15%-25% of the amount that is forgiven or settled.

Fees can increase the amount you have to repay so it is important to understand what you’re paying upfront and how it can add up in the long-term.

Scams

If you are looking into debt relief services such as credit counseling, debt management plans, or debt forgiveness, you need to be sure that the company is legitimate. A debt relief scam could make you a victim.

Also, you need to be able to distinguish between debt management plans, debt consolidation, and debt settlement. You may not understand all the terms used by debt relief providers if you do not carefully read or listen.

These red flags should be noted when you are comparing debt relief firms:

  • Service providers may not offer services unless they are paid in full.
  • Lack of transparency about what the company does/provides
  • Requests to have access to banking or personal information
  • Promises and warranties that look too good to keep are impossible to believe

Consumer Financial Protection Bureau’s (CFPB) keeps a record of complaints from consumers about debt relief providers and other financial service providers. The Better Business Bureau also has a database that can be used to check a company’s standing.

How does debt relief impact your credit score?

The potential for debt relief to have an impact on your credit scores and credit reports is there. However, the actual impact depends upon which option you select and where your credit score started.

You may be several months behind on your payments to settle debt. Your credit score can suffer the most from late payments.

A debt management program may have a small impact on your credit, provided that your creditors continue reporting the account as paid. Credit counseling may have little to no effect on credit. You may be able to lower your debts, make timely payments and get credit counseling.

To ensure your credit score is not negatively impacted, you should read carefully the fine print before signing up for any loan or credit card relief program. Regular monitoring of your credit reports and scores is a great way to identify any changes.

Bottom Line

If you feel overwhelmed by debt, debt relief can help you find the light at end of the tunnel. It can also prevent you from having to file for bankruptcy. For the best solution, it is important to know what you hope for from debt relief.

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