Debt Relief: What Is It, And Is It A Good Idea?
Matt Cardwell8-Minute Read
UPDATED: July 26, 2023
Do you feel like you’re drowning in debt and struggling to keep your head above water? If so, you’ll probably be relieved to hear that several forms of debt relief can help you get back on your feet.
With the right program and company, you may be able to gradually pay off your debts while reducing your fees. However, debt relief isn’t for everyone, and it could have some negative consequences for you and your credit history.
Let’s discuss the different types of debt relief programs, their pros and cons, and some tips for choosing the best option.
What Is A Debt Relief Program?
A debt relief program is a type of assistance or educational course designed to help borrowers pay off outstanding balances with their credit card companies or other financial institutions. In most cases, these programs help the consumer pay back their debts while minimizing their creditors’ interest charges or late fees.
When Is Debt Relief A Good Idea?
It can be difficult to avoid going into debt, especially in the case of an emergency or a necessity. For example, medical bills and student loans may be inevitable if you have to seek immediate care from a hospital or you don’t have the money to pay for college.
Keep in mind, though, that not all debts are the same. For example, if you have a few outstanding credit card bills that you can pay off with relatively a small amount of effort, you probably won’t need to enroll in a debt relief program.
On the other hand, you may want to consider a debt relief strategy if either of the following is true:
- You can’t pay off your debt within 5 years, even with a budgeting plan in place.
- Your total unpaid debt equals half or more of your gross income.
If you find you have too much debt to realistically pay off within a few years, debt relief could be your best way out.
How Do Debt Relief Programs Work?
The results of your debt relief program depend primarily on the company you work with and what solutions make the most sense for your situation. Strategies can include reducing the principal amount you owe, lowering your loan’s interest rate and extending the term of the loan.
If you’ve decided to use a debt relief program, the first step is figuring out which option is right for you.
Types Of Programs For Debt Relief
There’s no one way to ease your debt, and the process you decide on will depend on some key factors. The most important details to consider are:
- How much debt you owe
- The interest rates on your loans
- The overall health of your credit
With these factors in mind, review your options for debt relief below and see which ones suit your situation.
While not a plan or program per se, credit counseling can be a good place to start. Credit counselors can help you with budgeting, personal finances and managing your credit. A credit counseling agency can also steer you in the right direction for your debt relief plan.
Some non-profit organizations, religious groups and financial institutions offer credit counseling at no cost. As with any professional service, take the time to research and find a counselor who’s the right fit.
One common way people simplify the debt they owe is debt consolidation. When consolidating your debt, you combine your loans into a single monthly payment with new rates and terms.
It’s possible to consolidate debt in a few ways, if that’s the route you want to take. For instance, you can take out a personal loan to pay off debt with a single lump sum, then start again with a whole new repayment plan. If you’re considering this option, make sure your credit score and income qualify you for a personal loan.
A balance transfer card can be another appealing option for borrowers underwater with credit card debt. Balance transfer credit cards offer 0% interest rates for a set introductory period. If you can confidently pay off your remaining principal within that period, you can save a lot in interest. Once the promotional period ends, though, you’ll be at the mercy of high interest rates.
Debt settlement may sound attractive, but it can be a risky endeavor. Through this process, you’ll work with a debt settlement company that’ll negotiate with your creditors on your behalf to reach a settlement that could potentially reduce the amount you owe.
Success with a debt settlement program depends entirely on whether your creditors will agree to work with the agency you’ve chosen. Some debt settlement companies will also suggest you stop making payments on your debts, possibly leaving you with late fees or interest you’ll owe and can further impact your credit score.
Keep in mind: You never need to pair up with an outside company to settle your debt. After all, not all lenders will work with debt settlement companies or accept a debt settlement company’s offer.
The easiest way to approach your debt is to call your lender and work on restructuring your repayment plan. If you simply ignore the problem and stop making debt payments to your lender, not only will you get stacked with late fees and interest, but it will also have a serious impact on your credit score.
Credit counselors often recommend enrolling in a debt management plan (DMP). With a DMP, your amount owed doesn’t change, but you can find relief from some of the stress of making all your payments on time.
A DMP requires only one monthly payment from you – similar to debt consolidation – and your credit counseling organization distributes the funds where they need to go according to an agreed-upon payment schedule with your creditors. In addition to a simplified monthly payment, your credit counselor can negotiate lower interest rates or have some fees waived entirely.
Debt forgiveness may sound too good to be true, but under certain circumstances, you could have your debt partially or fully erased. Debt settlement companies can negotiate a lower principal for you to pay, or you can negotiate directly with your lender or loan servicer to see if you qualify for a debt forgiveness program. If eligible, you can erase a portion or all of your debt. For more information, talk with your lender about how you might move forward with this solution.
Filing For Bankruptcy
Debt consolidation, settlement or a DMP won’t make much of a difference if you’re still struggling to make your monthly payments. If you absolutely can’t afford your monthly payments and you’ve explored all other options, you may need to consider bankruptcy. More of an alternative to debt relief than a solution, bankruptcy can eliminate most or all of your debt.
Speak with a bankruptcy attorney or other financial professional before pursuing this action to better understand your options, eligibility and the form of bankruptcy to consider. Be warned, though, that filing for bankruptcy will decimate your credit and be visible on your credit report. In fact, Chapter 7 bankruptcies are visible on your credit report for 10 years from the filing date, and Chapter 13 bankruptcies are visible for 7 years after the filing date.
How To Find The Best Debt Relief Option
The Consumer Financial Protection Bureau (CFPB) says dealing with debt relief companies can be risky, so if this is the path you take, be sure to do your research to avoid the common pitfalls associated with these companies.
You’ll want to look for a company that specializes in your type of debt, charges the lowest fee percentage and is accredited by the American Fair Credit Council, the International Association of Professional Debt Arbitrators, or both.
Keep an eye out for these red flags when reviewing debt relief companies:
- They charge fees before settling your debt or entering you into a DMP.
- They advertise a “new government program” – that doesn’t exist – for bailing out credit card debt.
- They guarantee they can erase or pay off your unsecured debts.
- They try to enroll you in a program before reviewing your financial situation with you.
- They encourage you to cease all communication with your creditors without explanation.
- They promise they can prevent lawsuits, collection calls or visits from debt collectors.
- They guarantee they can settle all of your debt.
Failing to consider these red flags is a good way to fall for debt relief scammers. If you’ve been approached by a fraudulent agency, you can report potential scams to the Federal Trade Commission (FTC).
Program Factors To Consider
Despite what its name suggests, debt relief has the potential to make matters even worse for the borrower. Other than being mindful of scammers, as discussed above, you’ll want to consider the following factors before committing to any debt relief program.
High Interest Rates
If you’re going with a debt consolidation plan, ensure you’ll get a lower interest rate. Otherwise, it could just be a waste of time and money. Also be sure to compare rates and terms from lenders when shopping around. You can also face high interest rates with a balance transfer card if you fail to pay off your debt within the 0% APR promotional period.
Debt relief isn’t free, unfortunately. Debt settlement companies can charge a fee of 15% – 25% of the amount you owe. A DMP can also include a setup charge and monthly fees. Debt consolidation loans, like personal loans, may charge origination fees as well.
A debt settlement plan that lowers your amount owed can absolve you of that debt, but the amount you save will likely be seen as taxable income. If your goal is to save money, make sure to budget for those taxes.
A successful debt relief program requires on-time monthly payments and a commitment to the length of that program. If you fail to keep up with your payments, you’ll just accumulate more debt and miss out on that fresh start you were seeking in the first place.
Even with the risks involved, a debt relief program may be a good idea to consider if you truly want to escape your mountain of debt and can commit to making it work. Feel free to go back and review your options above to see which ones would suit your situation best.
If debt consolidation sounds right for you, you can get started today and apply for a personal loan with Rocket Loans℠.
Viewing 1 - 3 of 3
The Pros And Cons Of Using A Home Equity Loan For Debt Consolidation
Considering taking out a home equity loan to consolidate your debt? Read on to learn the pros and cons of using a home equity loan for debt consolidation.
Does Debt Consolidation Hurt Your Credit?
Debt consolidation may hurt your credit score initially, but eventually this strategy could help increase your score. Read here to find out more.