Settling your debt can be overwhelming. Debt relief can help you manage your debts with debt management plans and other debt solutions. Explore your options to settle your debt.
What is debt relief?
If you are struggling with significant debt, usually credit card debt, and are having trouble repaying it, debt relief programs can help you get your finances under control. In short, debt relief makes it easier to manage and handle your secured and unsecured debts.
It works by connecting you with a credit counselor and managing your debt. It can include:
- Lowering interest rates
- Debt consolidation loans
- Refinancing and changes to your repayment terms
Although bankruptcy is also technically another way to handle your debts, there are significant risks to your credit report and credit score.
Debt relief companies
There are debt settlement companies with relief programs to help you settle any debts. These programs can take on many different forms, offering different solutions based on your needs. However, not all credit counseling is created equal; there are many different options and things to weigh out.
Is debt relief right for me?
These types of programs are not right for everyone. If you are not interested in making any long-term commitments to repaying debt or are still continuing to add to your debt balances, relief from your debt will probably not be enough. You must be willing to make some serious lifestyle changes in order to settle your debts.
If you find yourself consistently late on your loan repayments or defaulting on credit card debt, are struggling to afford bill payments, have contemplated bankruptcy or have previously tried to manage your debt on your own without any significant progress, a debt relief program may be for you.
The downsides of debt relief
Debt relief programs can help you if you are drowning, however it is not a perfect solution. Always be aware of scams when shopping around for debt relief solutions.
Many debt relief options come with extra fees. You must decide if these extra fees are worth it in the long term to get you on your way to debt repayment and credit repair.
Debt consolidation requires you to take out a loan, resulting in origination fees, prepayment penalties and more. Credit counselors may charge a fee for their services. Balance transfers also often come with extra fees.
All of these fees can add up quickly; weigh out all of your options to see how they could affect the livelihood of your checking and savings accounts in the future.
In an ideal world, debt consolidation should result in a lower APR, allowing you to pay back debt faster. However, depending on your credit score, you may not qualify for a better loan or a lower interest rate to repay your debt.
The same applies for debt management plans. Always ask for a rate reduction when you are making your plan with a credit counselor.
What are my options for debt relief?
Because debt management is not a one-size fits solution, there are a multitude of ways to approach repayments. Here a few popular options to consider:
If you have several different loans or lines of credit you need to repay, debt consolidation will combine your debts into a single loan. It eliminates the number of payments needed each month down to one, easy monthly payment. Essentially, instead of paying back each credit card month by month, debt consolidation allows you to pay your credit card bills each month as one, lump sum payment.
Balance transfers also fall under this category. Credit card companies offer low to no interest for the first year or so of opening the card. By transferring your credit card debt from one card to another, you can save money and make payments easier with no extra interest accruement.
Debt Management plans
Debt management plans are similar to debt consolidation and allow you to only make one payment each month. However, they do not require you to take out another loan. Some programs will even lower your interest rates and waive certain fees.
These plans work best if you are already working with a credit counselor who can advise you what debts to enroll in the plan. Under these management plans, you may receive lower interest rates, however, you still must repay the entire principal amount of the debt.
Seeking a credit counselor
Meeting with a credit counselor is another route you can take to settle your debts. Meeting with an accredited counselor will give you guidance on your budget, debt and current finances. They will speak to you about your spending habits and debts, creating a personalized plan for managing your personal finances.
Credit counselors are great for those looking for help in creating a debt repayment plan and for those seeking additional education on budgeting and finance help.
Before seeking a counselor, you should check the agency’s and the counselor’s accreditation status with the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).
Settling your debt should only be used as a last resort. In debt settlement, you pay off your debts for less than what you currently owe. If your credit card com[any agrees to a debt settlement, the remaining balances are automatically canceled or forgiven.
Typically, you must already have defaulted on a number of payments before your creditor will consider negotiating a debt settlement. Because of the late payments needed to qualify for settlements, they can be absolutely detrimental to your credit score.
In addition, debt settlement comes with additional tax implications, as the amount of debt forgiven is often considered to be taxable income.
One of the great parts of debt settlement is that you can either do it yourself or work with a debt relief company who will negotiate for you. If you already have the cash to pay your creditors and you are comfortable negotiating on your own, you can go directly to your creditor to work out a deal.
If you choose to have a company do it for you, there are often additional fees involved in order to pay the company for helping you.
Filing for bankruptcy
Filing for bankruptcy is not something we recommend. However, if you are not going to be able to pay back your debts after negotiating for a debt settlement or enrolling in a debt management plan, bankruptcy might be your only option.
The first step is to talk to a bankruptcy attorney to determine if you qualify. Common forms of bankruptcy will erase most credit card debt, personal loan debt and medical bill debt.
However, bankruptcy is detrimental to your credit score, staying on your credit report for up to 10 years. It can affect your eligibility for getting jobs, your chances of qualifying for a mortgage or lease and more. It also will make any co-signers solely responsible for your debts. In addition, you may lose property or be sued by your credit card company.
How will debt relief impact my credit score?
Debt relief can affect your credit – the extent of which is determined by the repayment options you choose and your starting credit score.
Often, most of the damage to your credit has already been done by the time you need a debt relief plan. This is especially apparent when it comes to settlements, as they require you to be several months behind on payments already.
Debt management plans and credit counseling services have little to no negative impact on your score, as long as you stick to the terms provided. The best thing you can do for your credit score at this point is to reduce the amount of money you owe. Over time, this can help rebuild your credit and raise your score with consistent on-time payments outlined by your repayment plan.
If you are looking to rebuild your credit, we may be able to help with our credit report management program.
If you are drowning in debt, it can be extremely overwhelming. Debt relief plans can help ease some of your debt burden. Understanding your options will allow you to make the best decision for your life when it comes to setting your debts.