Debt Relief Programs: Options to Reduce Debt
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Debt can seriously impact your life. Here’s what you need to know about your options, and how to decide when it’s worth pursuing.
In this post:
When debt relief makes sense
Debt relief is a broad term that refers to many different approaches. You could eliminate your debt completely by filing for bankruptcy, or you could negotiate with creditors to pay off a reduced amount.
In general, it makes sense to consider debt relief in the following situations:
- You have significant consumer debt, and you can’t make a repayment plan yourself with your creditors.
- You’ve already cut back on your expenses and don’t have any extras to cut from your budget.
- You are unable to increase your income.
- You have no realistic expectation of being able to pay off your debt within five years.
If you’ve put together a detailed budget, done all you can to save money, and tried to increase your income and still can’t make ends meet, debt relief may be the best option. for you.
If you haven’t already, it’s usually best to consider debt consolidation before pursuing debt relief.
3 types of debt relief
When it comes to debt relief programs, there are three different ways to manage your balances.
1. Debt management plans
If you have too much debt or are unable to repay your debt, a credit counseling agency may recommend that you pursue a Debt Management Plan (DMP). With this approach, a certified credit counselor examines your finances and develops the DMP. Every month you send payments to the credit counseling agency and they use it to pay your creditors on an agreed schedule.
Under the DMP, the agency can negotiate with creditors to waive certain fees or reduce your interest rates. A DMP requires you to make regular and on-time payments, and you can make payments for several years. As part of the DMP, you may have to agree not to use or apply for additional credit while you pay off your debt.
2. Debt settlement programs
With debt settlement, a company works on your behalf to convince your creditors to accept a reduced settlement instead of the full balance you owe. For example, accredited debt relief clients only pay 68% to 75% of the listed debt upon successful completion of the program. If you had $ 30,000 in consumer debt, that means you would only pay off $ 20,400 to $ 22,500.
It may sound surprising, but the Consumer Financial Protection Bureau warns that debt settlement can be risky.
While the settlement process is in progress, the debt settlement company will usually tell you to stop paying your creditors. During this time, late fees, penalties, and interest will continue to accumulate, and your credit score may be negatively affected. You might even end up with more debt than you started with.
Debt settlement companies generally charge high fees for their services. For example, the charge for national debt relief is 18% to 25% of your listed debt. And, the program can take up to four years to complete.
These savings on debt settlement may justify these costs and inconveniences, but you should carefully consider your options before proceeding. Also, keep in mind that there is a possibility that the debt relief company will fail in a successful negotiation. But they can only legally bill you if they have successfully negotiated your debt.
If you’ve exhausted your other options, declaring bankruptcy may make sense, but it should be a last resort.
When you file for bankruptcy, the court will review your situation. If he agrees that you are unable to repay your debt, he will issue a court order releasing the debt. This means that you will no longer owe money on your credit cards, medical bills, or personal loans.
Because the debt is discharged, all debt collection activity stops. You will no longer receive harassing phone calls or letters in the mail, and debt collectors cannot garnish your pay.
However, bankruptcy has serious consequences. Bankruptcy information can stay on your credit report for up to 10 years and can make it difficult to obtain credit, buy a home, or even qualify for credit. life insurance. Plus, the bankruptcy process can be costly. You will have to pay court costs and if you hire a lawyer their fees can be expensive.
If you decide to file for bankruptcy, you must seek credit counseling from a government approved agency within six months of filing. You can find a list of eligible programs on the United States Directors Program website.
Learn more: Debt Consolidation Vs Bankruptcy: How To Choose
3 times you shouldn’t ask for debt relief
If you’ve lost your job or suffered a medical emergency, debt relief can be extremely helpful and give you the flexibility you need to get back on your feet. However, it is not for everyone. Here are three situations where debt relief doesn’t make sense.
- You have not yet contacted the creditors
- You can pay off your debt within five years
- You are eligible for debt consolidation
1. You have not yet contacted your creditors
If you can’t pay your payments, contact your creditors immediately – this should be your first step. Student loan managers, personal lenders, and even credit card companies sometimes have hardship programs, where you can make lower payments or get a lower interest rate.
Communicate directly with your creditors and explain your situation, indicating what you can afford to pay and what kind of help you need. You may be eligible for temporary programs that cost you nothing.
2. You can pay off your debt within five years
If you can pay off your debt within five years by cutting back on spending or working on it, debt relief is not necessary for you. You can work with a nonprofit credit counseling agency to budget and get personalized debt settlement advice so you can pay off your balances without paying extra fees or damaging your credit.
3. You are eligible for debt consolidation
If you are in debt, but still have good credit, you may be able to tackle your balances with debt consolidation. With this approach, you take out a personal loan or make a balance transfer to lower the interest rate on your debt. With a lower rate, more of your payment goes towards principal rather than interest, which helps you save money and get out of debt faster.
Credible allows you to compare the offers of several Personal loan lenders at the same time, allowing you to get the best rate.
Get the help you need
Dealing with debt can be a grueling experience, but debt relief can help you get over it. Before pursuing a debt relief program, be sure to do your homework to make sure you choose the path that best suits your finances and goals.