Debt Relief: How Does it work & What are my Options?
Posted on November 10, 2020 in Debt
Debt relief programs are a workable and fair way for consumers to solve financial problems. They help arrange affordable payments that reduce and eventually eliminate debt. The solution sometimes asks lenders to lower interest rates, reduce monthly payments, dramatically reduce the deficit, or extend repayment terms for a year or two. If your credit score is satisfactory, lower the interest rates and monthly payments by gathering and consolidating all unsecured debts into one monthly payment.
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Not all debt-relief programs work for consumers. Success depends on commitment, goals, and resources. No program solves every financial problem. A consumer needs to be comfortable with the responsibilities and requirements involved in a debt relief program selected.
How Does Debt Relief Work?
There are five main forms of debt relief. The time frame and methods vary for each one. Allow three to five years to rebuild your credit and completely erase the debt. The five debt relief options include
- Credit counseling
- Debt consolidation
- Debt management
- Debt settlement
Sometimes building a budget to assess how much money comes in and goes out is a simple debt relief solution. Only 40 percent of consumers operate off a budget. Nonprofit agencies have experts to help with budgeting and provide the service free of charge. They work with lenders to reduce interest rates on debt and lower monthly payments to something that is affordable for the consumer.
By yourself, carrying out a debt relief program is possible, but few consumers have the experience and training to accomplish it. Like Turbo Debt, credit consulting services have the tools to help take control of finances and begin a path to building wealth.
The company gathers facts about debt obligations, expenses, and income. A ‘soft’ credit report check verifies the information is up-to-date and accurate. Services provided include
- Developing and living on a budget
- Credit report educational materials
- How to improve a credit score
- How to manage your money
- How to pay off your debt
The counselors guide you through managing a financial crisis and offering financial planning and education to manage finances in the future better. Those with severe debt can enter into a debt management plan that systematically pays down debt by making deposits to a credit agency. That agency distributes payments to creditors. It usually takes 30 to 60 months to repay debts through a debt management plan.
If a counseling agency negotiates lower interest rates, you save money with the option. Closing your credit card accounts is sometimes an option, with no new credit applications until the debt management plan is complete. Settlement companies negotiate with creditors to settle an unsecured debt for less money than what one currently owes.
Becoming Debt Free: What Are My Debt Relief Options?
If you are nervous about answering your phone or picking up your mail because a credit card company or bank calls or sends requests to address your debt, you are not alone. Many people struggle with obtaining relief from debt. When debt spirals out of control, digging out is a significant challenge, but there are companies like TurboDebt who can help you find relief through expert consulting services.
Feeling like you are unable to pay off debt is extremely stressful. There are options available. Some are not particularly pleasant but provide relief. Do not avoid the debt problem. If chucking bills into a pile became a habit, it is time to open them. Make a list of the debts owed and the minimum payment required.
Look at the income available and the expenses you have to get a clear picture of where you stand. Unless you know how significant the debt burden is and how short it is to pay off debt, you cannot make the necessary decisions to grapple with debt. Options include
- Talking to credit card companies
- Dealing with your mortgage
- Get credit counseling
- Get a loan to consolidate debt
- Deal with student loans
While not the ideal situation, sometimes a credit card company allows a payment arrangement that is better than receiving no payment at all. If you have a mound of credit card debt, it is worth picking up the phone and trying to negotiate with a credit card company.
If interest rates are lower, consider refinancing your mortgage. Check to see if options to reduce current monthly payments or temporarily suspend them are available under a government modification program. Working with a credit counseling service helps get a clear view of available options that include debt relief programs that teach how to budget and maintain it.
A debt consolidation loan enables paying off debt with one monthly payment. The loan needs to have a lower interest rate and lower required payments. A student loan lender sometimes allows a better payment plan that works for your budget. Sometimes, bankruptcy is the only option. There are two options. Chapter 7 eliminates debt; Chapter 13 is an arrangement to pay some or all debt over a specific period. Bankruptcy has pros and cons. It is judicious to consult an attorney to get a bankruptcy evaluation.
Debt Relief Through Settlement Programs
A settlement is one of the debt relief options that allow paying a lump sum that is usually less than the amount owed to ‘settle’ or resolve a debt. It is a service generally offered by a third-party company claiming to reduce debt by negotiating a settlement with creditors.
While the prospect sounds great, it potentially impacts credit scores and sometimes costs more money. It is of importance to research settlement programs and debt mediation services to avoid scams. Read debt relief reviews, and understand that companies typically offer to contact creditors on behalf of the client to reduce or settle a debt or negotiate a better payment plan for the client.
They usually charge a fee equal to a percentage of the amount saved on the debt. Sometimes, the company attempts to negotiate a lump-sum payment with the creditor less than the amount owed. While dealing, the company requires regular deposits into an account under the client’s control but administered by a third party.
The money in the account goes toward the lump-sum payment. The settlement company often advises stopping paying creditors until they reach an agreement. When the creditors and company reach an agreement, the client makes at least one payment to the debt collector or creditor for the settled amount.
The settlement company then begins charging fees for its services. A successful settlement is one in which the client walks away without paying the full debt amount. There is no guarantee the settlement company can reach a settlement agreement for all debts.
There are pros and cons to settlement. The pros include
- Lowering the debt amount
- Helps avoid bankruptcy
- Gets collectors and creditors off your back
The risks sometimes outweigh the benefits. They include
- Creditors not agreeing to negotiate
- Ending up with more debt
- Charged fees, even if some debt remains unsettled
- Negative impact on your credit
Some creditors refuse to negotiate with settlement companies. Late fees and interest accrue when a person stops making payments. Lawsuits filed or other collection efforts are possible. Forgiven debt is taxable income on federal income tax. The debtor pays tax on it.
Debt settlement companies collect no fees until they reach an agreement; you agree to the settlement and make a minimum of one payment to the debt collector or creditor involved in the deal. Paying a portion of the company’s fee for unsettled debt is a possibility. If the company settles one debt out of five or six, they have the right to charge fees as soon as they receive a result.
Is Debt Relief a Good Idea?
Debt relief helps make monthly payments more manageable by replacing debt with a loan having different terms that include waived fees, a lower interest rate, or reduced balance or extended loan term, or through debt negotiation. While ii is a tool to help avoid bankruptcy, it is not right for everyone.
It is of importance to understand the potential risks and benefits before deciding on a debt relief solution. Getting rid of debt is a long-term solution, meant to help get out of debt over several years. The National Foundation for Credit Counseling never recommends professional debt settlement.
Yet, the NFCC provides useful information to gather before enrolling in a settlement program. It suggests knowing
- How much it costs
- How long it takes
- How does debt relief work
Consider all the downsides. If you decide to pursue a debt settlement program, have the answers to these questions. The programs are what some consumers need. Others experience more harm than good. Carefully weigh the positives and negatives. The cons are
- The programs have the potential to harm your credit
- There are fees to pay
- Debt forgiveness is taxable
- Lawsuits are possible
- Creditors are under no obligation to work with settlement companies
- Applies to only certain types of debt
Not all efforts are successful when a company tries to negotiate a lower settlement. If you stop making payments, creditors still report indiscretions to the credit bureaus, and fees and penalties accrue. Depending on the number of payments behind you are, creditors sometimes sue for debt collection to force payment.
Typical fees are a percentage of the total debt. Monthly payments to a program include a portion going toward debt and an amount toward fees. What the amounts are is uncertain. In some cases, forgiven debt is taxable income. There is no guarantee that a settlement company can negotiate payment plans for student debt. They usually are not able to do so.
The Consumer Financial Protection Bureau offers a guide on debt collection that helps decide what steps to take. It suggests contacting a local consumer protection agency or your state’s attorney general to see if there are complaints against a settlement company.
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