Debt Relief: What Are Your Options, And Is It A Good Idea?
8-Minute ReadJune 06, 2022
Do you feel like you’re drowning in debt and struggling to keep your head above water? You’d be far from the only one, and while misery loves company, it doesn’t make things any better.
In all seriousness, if you’ve found yourself in such a situation as described above, you may want to look into your debt relief options. With the right program and company, you may be able to gradually pull yourself out of that pit of debt you’ve fallen into. Debt relief isn’t for everyone, and it could come with some negative consequences for you and your finances. Knowing that, you should read our article below and see if debt relief is the right option for you.
What Is Debt Relief?
First things first: What is debt relief? Put simply, debt relief is a process through which you can make your overwhelming debt more manageable. Depending on your program, debt relief can reshape your debt and make it easier for you to pay it back, or in some cases, reduce it.
When Is Debt Relief A Good Idea?
Nobody enjoys owing or repaying debt, but you may want to consider a debt relief strategy if either of the following is true:
- It is impossible for you to 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 Does Debt Relief Work?
The results of your debt relief program depend largely on the company you work with and what solutions make the most sense for your situation. Solutions can include a reduction of the principal amount you owe, lowering your loan’s interest rate or extending the term of the loan. The first step to debt relief is figuring out the best strategy for it.
Types Of Debt Relief
There is no one way to ease your debt, and what 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, undergoing credit counseling can be a good place to start. Credit counselors can help you with budgeting, personal finances and managing your credit, and can steer you in the right direction for your debt relief plan. Credit counseling is typically offered by nonprofit agencies at no cost. As with any professional service, make sure you do your research in order to find a counselor that is the right fit.
One common way people simplify the debt they owe is through debt consolidation. When you consolidate your debt, you combine your various loans into a single monthly payment with new rates and terms. There are a few different ways to consolidate debt, if that’s the route you want to take. You can take out a personal loan that will pay off your existing balance and you can start again with a whole new repayment plan. If you’re considering this debt relief route, make sure your credit score and income qualify you for a personal loan.
For those underwater with credit card debt, a balance transfer card can be an appealing option. 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 of time, you can save yourself 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 at first glance, but it can be a risky endeavor. Through this process, you’ll work with a debt settlement company that will negotiate on your behalf with your creditors to reach a settlement that could potentially reduce what you owe.
Success with this process is entirely dependent on whether your creditors will agree to a settlement. Some debt settlement companies will also suggest you stop making payments on your debts, which could leave you with late fees or interest owed.
You Can Do Debt Settlement On Your Own
Keep in mind, you never need to work with an outside company to approach settling your debt. After all, not all lenders will work with debt settlement companies or accept a debt settlement company’s offer. The easiest way that you can approach your debt is by calling your lender and work on restructuring your repayment plan (we want you to financially succeed and find a way to move forward). If you simply ignore the problem and stop making payments to your lender, not only will you get stacked with late fees and interest, but also a serious impact to your credit score.
Credit counselors will often recommend you enroll in a debt management plan (DMP). With a DMP, your amount owed doesn’t change, but you can be relieved of some of the stress of making all of 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 also 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 yourself 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 to your lender and see how you can 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 cannot afford your monthly payments, and you’ve explored the other options available to you, you may want to consider bankruptcy. More of an alternative to debt relief than a solution, declaring 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 form of bankruptcy you should file for. Be warned, though, that filing for bankruptcy will decimate your credit and be visible on your credit report: Chapter 7 bankruptcies are visible on your credit report for 10 years from the filing date and Chapter 13 bankruptcies are visible on your credit report for 7 years from the filing date.
How To Find The Best Debt Relief Companies
The Consumer Financial Protection Bureau advises that 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, one that charges the lowest fee percentage and, of course, a company that is accredited by either the American Fair Credit Council or the International Association of Professional Debt Arbitrators – or both, ideally.
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” for bailing out credit card debt – this doesn’t exist.
- 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 and debt collection calls.
- They guarantee they can settle all of your debt.
Failing to consider the above factors is a good way to fall for debt relief scammers.
How Debt Relief Can Go Wrong
Despite what its name suggests, debt relief has the potential to make things 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, be sure you’ll be getting a lower interest rate out of the ordeal. Otherwise it could just be a waste of time and money. Be sure to compare rates and terms between different 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 total amount you owe. A DMP can include a setup charge and monthly fee as well. Debt consolidation loans, like personal loans, may also charge origination fees.
A debt settlement plan that lowers your amount owed can absolve you of that debt, but the amount that you save will likely be seen as taxable income. If your goal is to save money, make sure to budget for those owed taxes.
Not Completing Your Program
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, then you’ll just accumulate more debt, and miss out on that fresh start you were trying for in the first place.
Final Thoughts: Is Debt Relief A Good Idea?
Even with the risks involved, if you truly want to escape your mountain of debt and are able to commit to making it work, it may be a good idea to consider a debt relief program. Feel free to go back and review your options in the article above to see which ones would suit your situation best.
And if debt consolidation sounds right for you, you can get started today and apply for a personal loan with Rocket Loans®.
Table of Contents
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What Is Debt Consolidation, And Does It Make Sense For You?
Debt consolidation is a strategy you can use to combine multiple debts into one easy-to-manage payment. Read on to find out if it's the right option for you.
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.