Are you having trouble managing your debt? There are debt relief programs that can help, but you should understand how they work before enrolling. It’s also ideal to weigh the benefits and drawbacks of each to ensure the option you select is a good fit.
What is a Debt Relief Program?
Debt relief programs are designed to help consumers manage their unsecured debt more effectively. They’re usually offered by for-profit entities that are referred to as debt relief or debt settlement companies.
What Do Debt Relief Companies Do?
When you enroll in a debt relief program, they will negotiate with creditors on your behalf to reach better terms or a fair settlement. Services are rendered in exchange for a fee generally payable if the negotiations work in your favor, and you agree to the new terms or settlement offer.
How Do Debt Relief Programs Work?
Depending on the program you select, you could get a lower interest rate, an extended repayment term to make your monthly payment more affordable, or a reduction in your outstanding balance in the form of a settlement offer.
Consider reaching out to a reputable company to learn more about how debt relief programs work and if they could work for you, ideally before your accounts have been turned over to debt collectors.
Types of Debt Relief
The phrase, debt relief programs, encompasses several options. Before you enroll in a program, it’s best to understand what it entails and how it could impact your finances and credit health. Here’s a breakdown of how each method works:
Debt Settlement Programs
Debt settlement programs focus on reaching settlements with creditors for an amount that’s lower than what’s owed. It could be appealing if you’re saddled down by debt, as you’ll reduce your outstanding balance and possibly get out of debt faster than making your minimum payments and provided you successfully complete the program.
Still, there are potential consequences to be aware of if you enroll in a debt settlement program. Many consumers voluntarily stop making their payments and put the funds in a dedicated account instead. Once a settlement is reached, these funds are used to pay the creditor directly.
While you could resolve your debt balances quicker, your credit could also be impacted. Missed or late payments lead to added fees and negative marks on your credit report. Plus, settled accounts linger on your credit report for up to seven years and could hurt your credit rating. The good news is you can start taking strides to rebuild your credit after completing the program.
Debt Management Plans
Debt management plans (DMPs) could also provide relief if you’re overwhelmed by debt. They’re available through credit counseling organizations and require you to make a monthly deposit that is used to pay unsecured debts.
But here’s the catch: the credit counselor remits payment in accordance with a payment schedule they create with both you and your creditors. Another stipulation is that you have to refrain from using or applying for additional credit accounts for the plan’s duration.
Most DMPs take at least 48 months to complete, and you should make timely payments each month for the plan to work out in your favor. While enrolled, you could receive lower interest rates or other concessions from your creditors.
Debt Consolidation
When you consolidate your debts, you roll them into a new credit card or loan product. The existing balances are wiped clean by the balance transfer credit card or debt consolidation loan. Consequently, you only make one monthly payment on the new account.
This approach is only practical if you:
- Pay off the balance before the 0 percent APR introductory period ends (if you’re using a balance transfer credit card)
- Secure a lower interest rate (if you’re using a debt consolidation loan)
It’s equally important to refrain from using the credit cards you paid off when you consolidated the balances. Otherwise, you could end up in far more debt than you started with.
Credit Counseling
Credit counseling services are usually available through nonprofit credit counseling agencies, some offer services free of charge. Credit counselors can assist you with general money management techniques and help you devise a plan to handle your outstanding debt obligations more effectively.
Debt Forgiveness
You can work directly with a lender to seek forgiveness for a portion of your debt. Another option is to hire a debt settlement company to negotiate an offer that requires you to pay a fraction of what you, but in a lump sum payment, to satisfy your balance.
Some creditors and lenders also offer financial hardship programs to distressed consumers. They may agree to forgive some of your debt if financial challenges hinder you from making the minimum monthly payment.
Debt Relief Options for Most Common Types of Debt
Wondering which debt relief options are best for your debts? Here’s a breakdown based on the type of debt you have:
- Credit card debt relief: debt settlement and debt consolidation
- Auto loan debt relief: refinancing, auto loan consolidation, forbearance, or voluntary vehicle surrender
- Medical debt relief: debt settlement (most ideal) or debt management
- Payday loan debt relief: debt settlement (most ideal) or debt management
- Mortgage debt relief: loan modification, refinancing, forbearance or workout arrangement to prevent foreclosure; short sales, deed-for-leases, and deed-in-lieu of foreclosure are suitable options for a rapid exit
- Federal student loan debt relief: federal repayment plans, deferment, forbearance, Public Service Loan Forgiveness (PSLF) or Federal Direct Consolidation Loans
- Private student loan relief: private student loan settlement or student loan refinancing
Be mindful that unsecured debts, including credit cards, department store cards, and medical bills, generally qualify for inclusion in debt settlement programs. Secured debts, like mortgages, auto loans, and federal student loans, aren’t eligible.
Things to Consider When Looking for a Debt Relief Company
Not all debt relief companies are the same. Before you hire a company to help you resolve your debts, consider these factors:
- Are they accredited by the Better Business Bureau (BBB)?
- Are they a member of a trade association, like the American Fair Credit Council (debt settlement companies), Association of Certified Debt Management Professionals (credit counseling companies), or the National Foundation for Credit Counseling (credit counseling companies)?
- Are they approved by a government agency to operate? If so, can they legally operate in your state?
- Are the fees comparable to what others in the industry charge?
- What do past and current clients have to say about their program? (Visit sites like Trustpilot, Consumer Reports, and Ripoff Report to gain valuable insight).
- Does the company charge enrollment fees? (If so, services should be backed by a money-back guarantee).
- Are no-obligation consultations available?
