Debt relief can ease the burden of overwhelming debt, but it’s not right for everyone. Here are options to explore.
Discovering that no matter how much effort you put into repaying your debts, you’re making zero progress? If this sounds like your situation, it might be time to explore debt relief options.
What exactly is a debt relief program?
These are arrangements that modify the conditions or the total amount of your debt, aiding you to regain your financial balance more swiftly.
A debt relief plan may encompass:
Totally eradicating debt through bankruptcy.
Implementing a debt management plan for alterations in your interest rates or payment arrangements.
Negotiating with your creditors to settle your debt for a lesser amount than what is originally owed.
However, debt relief plans aren’t the adequate solution for everyone, so it’s crucial to grasp the potential risks involved.
The ideal time to seek debt relief
Consider options such as bankruptcy, debt management, or debt settlement if any of the following is true:
You’ve realized that repaying your unsecured debt (credit cards, medical bills, personal loans) within five years is impossible, even if you go to the extreme of slashing your spending.
Your unpaid, unsecured debt totals up to half or more than your gross income.
On the contrary, if it seems feasible to reimburse your unsecured debt within five years, consider a personal action plan. This can compromise of a mix of debt consolidation, direct appeals to creditors, and stricter budgeting.
Beware of Fraudsters and the Downside of Debt Relief
The debt relief industry is riddled with fraudsters keen to exploit your financial struggles. Many individuals who partake in debt relief schemes often fail to see them through. The outcome could be an even larger debt than you initially started with.
However, debt relief could also provide you the fresh start or the breather you desperately need to finally actualize substantial progress.
Before venturing into any agreement, ensure you comprehend — and validate — the following aspects:
The requisite qualifications.
The associated fees.
The creditors receiving payments, and the amount. If your debt is in collections, ascertain the ownership of the debt to ensure payments are correctly directed.
The tax implications.
Steer clear of debt relief schemes that pledge the following:
Request an upfront fee before settling your debt.
Promise a “too good to be true” solution for clearing your debt.
Assure they can cease all harassing calls from debt collectors.
Exploring Bankruptcy for Debt Relief
There’s minimal advantage in opting for a debt settlement or a debt management plan if you can’t meet the required payments. Engage with a bankruptcy attorney as your preliminary step. First consultations are often complimentary, and if you don’t qualify, you can explore other alternatives.
Chapter 7 liquidation, which is the most prevalent form of bankruptcy, can eliminate majority of credit card debt, unsecured personal loans and medical debt. This procedure can be finalized within three or four months if you’re eligible. Here’s what you need to know:
It doesn’t clear any outstanding taxes, child support obligations, and forgiving student loan debt is a rare phenomenon.
It will negatively affect your credit scores and remain on your credit report for up to a decade. Nonetheless, if your credit is already battered, filing for bankruptcy may expedite your credit rebuild in comparison to continued repayment struggles. (Detailed insights are available regarding when bankruptcy can be the best option.)
If a co-signer is involved in your loan, your declaration of bankruptcy would make that co-signer solely accountable for the debt.
If you accumulate more debts, another Chapter 7 bankruptcy filing cannot be initiated for eight years.
It may not be an ideal choice if it would necessitate surrendering property you wish to retain. Policies differ by state, but typically, some forms of property are exempt from bankruptcy, like vehicles up to a certain worth and a portion of the equity in your home.
Bankruptcy may not be a required measure if you are “judgment-proof,” which implies you lack income or property that a creditor can seize.
Further, not every person with massive debt qualifies. If your income surpasses the median for your state and family size, or you aim to prevent your home from foreclosure, you might have to file for Chapter 13 bankruptcy.
Chapter 13 is a three- or five-year payment plan approved by the court, structured on your income and debts. If you manage to adhere to the plan in its entirety, the remaining unsecured debt is wiped away. If you fulfill the stipulated payments (something the majority of people cannot), you retain your property. A Chapter 13 bankruptcy will be indicated in your credit report for seven years from the filing date.
Debt Relief via a Debt Management Plan
A debt management plan allows you to settle your unsecured debts — predominantly credit cards — in full, usually at a lowered interest rate or with waived fees. You make one payment per month to a credit counseling agency, which then disburses it among your creditors. Credit counselors and credit card companies maintain existing agreements intended to assist clients undergoing debt management.
On a debt management plan, your credit card accounts will be shut down and typically, you’d have to survive without credit cards until you have fully executed the plan. (Many people do not complete these plans.)
While debt management plans per se do not impact your credit scores, closing accounts can be detrimental. Once you’ve successfully completed the plan, you can apply for credit anew.
Failure to meet payments could expel you from the plan. It’s also crucial to choose an agency accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.
As always, ensure that you understand the associated fees and the potential alternatives you might have for tackling debt.
Debt Relief through Debt Settlement
Debt settlement is defined as a last resort intended for those burdened with overwhelming debt yet cannot qualify for bankruptcy or are reluctant to file for it.
Typically, debt settlement companies instruct you to halt payments on accounts included in the plan, and instead the money is deposited into an escrow-like account. As your account accumulates funds and you fall increasingly behind on payments, creditors are approached individually. The dread of receiving nothing may prompt the creditor to accept a smaller lump-sum payment in return for not pursuing the remainder of the debt.
However, be forewarned that according to the Consumer Financial Protection Bureau, your debts might balloon to even larger than your initial debt. This is due to late fees, interest, and other credit card debt-related charges as many debt settlement companies tend to recommend halting debt payments as a strategy to coerce creditors into negotiations.
Failure to pay your bills can result in collection calls, penalty fees, and potentially, legal actions against you. Lawsuits can culminate in wage garnishments and property liens. Debt settlement does not halt any of these while negotiations are underway, and settlement offers may take months to commence.
Depending on the size of your debt, the process could extend over multiple years and your credit score may continue to be damaged by ongoing late payments. You might also be liable for taxes on the forgiven amounts, which are categorized as income by the IRS.
You can attempt to settle a debt independently or engage a professional. It’s important to note that the debt settlement industry is plagued by unscrupulous entities, hence the Consumer Financial Protection Bureau, National Consumer Law Center and the Federal Trade Commission strongly advise consumers to exercise extreme caution.
It’s also worth noting that some of these companies misrepresent themselves as debt consolidation companies. This is inaccurate. Debt consolidation can be accomplished independently and will not harm your credit.
DIY Debt Relief
You have the option to integrate some of the previously mentioned debt relief methods and design your own strategy.
For instance, you have the ability to take the approach of credit counselors in debt management plans: Reach out to your creditors, explain your reasons for falling behind and discuss the concessions you need to regain financial stability. Most credit card companies offer hardship programs, and they may be open to reducing your interest rates and waiving fees.
You can also educate yourself about debt settlement and negotiate agreements by contacting creditors directly. (Learn ways to manage a debt settlement independently.)
If your debt is manageable, you can explore more traditional debt payoff methods. For instance, if your credit score is still sound, you may qualify for a 0% balance transfer credit card. During the interest-free period, your entire payment goes toward reducing the balance, thereby accelerating progress. Alternatively, you might be successful in securing a debt consolidation loan with a lower interest rate than your current one.
These options won’t negatively impact your credit; as long as payments are made timely, your credit score should recover.
If you opt for this direction, it’s crucial to establish a plan to prevent incurring additional credit card debt.
What Not to Do
There are times when overwhelming debt may strike in an instant due to events such as health emergencies, unemployment, or natural catastrophes. Alternatively, debt may accumulate slowly but surely until creditors and collection agencies start pressing for payment, and you find yourself unable to cater to their demands.
If debt stress is bearing down on you, here are a few things that you should refrain from doing:
Avoid putting off a secured debt (like a car payment) in order to settle an unsecured one (such as a hospital bill or credit card). By doing this, you stand to lose the collateral that secures that debt, in this case, your car.
Refrain from borrowing against the equity in your home. This action puts your home at risk of foreclosure, and you might be converting unsecured debt that could be settled in bankruptcy into secured debt that cannot.
Steer clear from pulling money out of your retirement savings to repay unsecured debt. This effectively lessens your chances of a financially secure retirement.
Think carefully before borrowing money from workplace retirement accounts. Should you lose your job, the loans might inadvertently become withdrawals, resulting in a tax bill, which is an additional stressor that you definitely do not need.
Resist making decisions based on which collectors are exerting the most pressure on you. Instead, allot time to study your options and select the best one that suits your current circumstances.
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