Key takeaways
- Debt relief strategies range from structured programs from credit counselors and debt settlement to DIY strategies and even bankruptcy.
- Understanding debt restructuring pros and cons is crucial for choosing the right debt relief method for your situation.
- Consulting with financial professionals can provide resources, education, and help you choose the best path to financial stability.
Debt relief programs help people manage overwhelming bills, pay dues efficiently, and potentially reduce what they owe. As consumer credit card debt grows, the number of people who seek debt relief is increasing.
There are many different types of debt relief – debt consolidation loans, debt settlement, credit counseling, or even bankruptcy. You can do it yourself or work with an outside agency. Each method has its own benefits – reduced interest rates or waived fees – and drawbacks – your credit score takes a hit. What method you choose depends on your individual circumstances and goals.
This article explores the pros and cons of debt restructuring. We’ll walk you through the different strategies, tactics, and services out there so that you can choose the one that speaks to you.
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Is debt relief a good idea?
Debt relief can be a smart move if you’re drowning in bills and struggling to make minimum payments. The right program can lower your total debt, reduce interest rates, or help you manage what you owe in a more structured way. But it’s not a one-size-fits-all solution.
Debt relief programs vary immensely. Whether or not they are a good idea depends on your situation and the program you choose.
How do debt relief programs work?
Debt relief is a broad term covering a range of measures used to pay off what you owe. It can be a formal, structured program or simply strategies you employ. Some methods reduce the total amount you need to repay. Others provide a plan that makes repayment more manageable.
Is a debt relief program a good idea? It can be a good idea for anyone with overwhelming unsecured debt. They can help you pay off what you owe more effectively and in less time than if you did it on your own.
Before choosing a debt relief program, consider the advantages and drawbacks. Understanding the pros and cons of debt restructuring is critical. Not every program is for everyone. The right program depends on your current debt level, income, ability to make disciplined payments, and credit score.
Most options will initially negatively impact your credit score. Some, like debt settlement and bankruptcy, have a long-term negative effect and cost money. You must thoroughly read what each method entails and make an informed decision that aligns with long-term financial goals.
Are debt relief programs legit?
Many debt relief programs are legitimate and operated by reputable organizations, including nonprofit credit counseling agencies and well-established debt settlement companies. The industry also includes bad actors who make false promises or charge upfront fees illegally.
Always do your research and verify a company’s credentials. Check for accreditation (such as with the NFCC or FCAA), and read reviews from trusted sources like the Better Business Bureau.
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Debt relief options to consider
Relief programs come in various forms, each with unique benefits and drawbacks. Common types include:
- Debt consolidation
- Debt settlement
- Credit counseling
- Debt management plan
- Bankruptcy
Each debt relief strategy suits different financial situations. Not all programs will work for everyone. Consider factors like the total cost, time to repay, credit score impact, and program flexibility. The best debt relief options will help you make consistent, affordable payments while minimizing damage to your credit score.
Debt consolidation
Consolidation is when you roll two or more bills into one. It can simplify your monthly debt payments and, when done right, will lower your interest rate, saving you money. Fees may apply, and you’ll need to be sure to secure a lower interest rate for it to work.
Pros: Simplifies payments, lowers interest rates, and improves credit score if managed well.
Cons: Initial score dip, may extend repayment period (increase total interest), additional fees, and need a very good score.
Debt consolidation does hurt your credit initially since applying for a new account triggers a hard credit inquiry. Fortunately, any negative effects are usually temporary.
Apply for a debt consolidation loan
The most common way to consolidate debt is to take out a debt consolidation loan. You apply for a personal loan with a lower APR (annual percentage rate) and use the money to repay your creditors. This leaves you with one monthly payment that should be lower than what you were paying previously. Most personal loans have lower APRs than credit cards, but the exact interest rate you secure will depend on your credit score. The single monthly payment will simplify your finances and make it less likely that you will miss payments or incur late fees.
Use a balance transfer credit card
Another option is to use a balance transfer credit card with a promotional 0% APR (or simply a lower APR). You transfer your high-interest credit card balances onto the new card. Pay it off before the promotional period ends to save on interest. The reduced interest rate can save you money and help you pay off your balances faster. Balance transfer fees may apply, and you have to pay off your total balance before the promotional period ends.
Debt settlement
Debt settlement or credit card modification involves negotiating with creditors to make a lump sum payment that is less than what you owe. This approach can significantly lower the amount you need to repay, but is inherently risky.
Pros: Reduces the total amount paid, provides a quick resolution.
Cons: Severely impacts credit score, potential tax implications, late fees can add up, fees from settlement companies, and it is not guaranteed to work.
Most people choose to work with a debt settlement company because they have expertise. Many debt settlement companies will ask you to stop paying your creditors and instead make payments into a dedicated account. Once enough funds have accumulated, the company negotiates with your creditors to accept a smaller lump sum payment. The idea is that the creditor will agree to a lower amount as they’d rather receive something than nothing. Most debt settlements occur when an account is over 150 days past due.
As with anything else, credit card modification has pros and cons. Yes, you can pay less than you owe, but creditors have no legal obligation to negotiate. While you’re working on your debt settlement plan, you stop making payments. This means the amount you owe will grow, and late fees and missed payments will all add up, hurting your credit score. If the forgiven debt exceeds $600, it is considered taxable income by the IRS. Debt settlement does not cover secured debt. Lastly, the debt settlement company will charge a fee of 15% to 25% of the original amount for their services.
Debt settlement certainly is a way to get out of what you owe and save money. The problem is that it is inherently risky and can do a lot of damage to your score.
Credit counseling
Credit counseling and debt management services are offered by both for-profit and nonprofit credit counseling agencies. If you can, go with a nonprofit credit counseling agency accredited by the Financial Counseling Association of America (FCAA). These agencies provide financial education, money management advice, budgeting tools, and more to help people with their personal finance issues.
Pros: Professional guidance, financial education, and budgeting help.
Cons: May charge for the service, requires a significant time commitment, and is not a quick fix.
Debt management plans
A debt management plan (DMP) is one of the services offered by credit counselors. The counselor will look at what you owe, your income, and your expenses. They will then create a payment plan tailored to your budget. They may negotiate with credit card companies for a reduced interest rate and waived fees. You make one payment each month to the credit counseling agency. They distribute the money among your creditors according to the agreed-upon schedule. The idea is to make your monthly payments affordable.
For a DMP to work, you must stick to the plan and may be required to close credit card accounts.
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Pros: Structured debt repayment plan, potential lower interest payments and waived fees, no more calls from collection agencies.
Cons: Requires closing credit accounts, initial credit score dip, and monthly fees for counseling services.
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DIY debt relief
You can DIY (do it yourself) debt relief like you can with anything else. Most people start with strict budgeting. Then employ strategies like the snowball method, prioritizing the smallest amounts first. Another option is the avalanche method. Here, you pay off the debt with the highest interest rates first. The right choice depends on the type of motivation you need. The snowball method will give you quick wins, while the avalanche method saves you money.
Pros: Full control over repayment plan, no fees, improved financial literacy.
Cons: Requires strong discipline and negotiation skills, no professional support.
You can also negotiate directly with credit card companies to reduce the amount you owe. Call your creditor and request that they waive fees, lower interest rates, reduce monthly payments, or even settle for a smaller sum. Creditors are often willing to work with you if it means they’ll receive some payment rather than none. It helps if you’ve been a good customer in the past and are polite and honest.
The main advantage of DIY is that you’re not paying any fees to a third party. The drawbacks are that you must keep yourself motivated and don’t necessarily have the negotiation expertise a professional debt settlement company or credit counselor has. DIY can be a good place to start, and then determine if you need extra help.
Debt relief through bankruptcy
Bankruptcy is a last resort. While it can offer a fresh start, it has significant long-term consequences. Your credit score will take a huge hit. Bankruptcy remains on your credit report for up to ten years and can impact future borrowing abilities.
Pros: Discharges most unsecured debts, offers a fresh financial start, stops calls from collection agencies.
Cons: Long-term negative credit score impact and potential loss of assets.
Bankruptcy is a lengthy and costly legal proceeding, and it’s not even guaranteed to work. Yes, credit card debts and personal loans can be forgiven, but not all qualify, and legal fees add up. If you file Chapter 7 bankruptcy, you may lose your assets. Chapter 13 bankruptcy lets you keep your assets, but you must follow a court-approved repayment plan that lasts three to five years.
Talk to a credit counselor and try other options before you resort to bankruptcy.
Who qualifies for debt relief?
How to qualify really depends on the service you’re interested in. In general, you have to have a substantial amount of unsecured debt to be eligible.
Unsecured debt includes:
- Credit card debt
- Personal loans
- Medical bills
- Utility bills
Figuring out how to get debt relief requires a realistic look at your financial situation. You need to consider your current income, debts, credit score, and budgeting skills.
Most debt settlement companies require at least $7,500 in unsecured debt, though they would prefer you to have $10,000 to $20,000. Having a larger balance gives them more leverage during negotiations, plus it means they can charge a higher fee.
Experts say bankruptcy is only worth it if you owe at least $10,000 due to the costs. To file for Chapter 7, you must prove that you do not earn enough to repay debts and that your income is less than the median income of your state. To file for Chapter 13, you must owe less than $2,750,000 in total and be current on all tax filings. You cannot file for bankruptcy if you have done so recently.
There is no required amount for credit counseling or a DMP. However, for a DMP to work, you must have a steady enough income to make consistent monthly payments. You will also need to owe a large enough amount for it to be impossible to fix with better budgeting.
Consolidation qualifications depend on your credit score. To secure a low-interest personal loan or balance transfer card, you must have good to excellent credit. You also must have sufficient income to repay the new loan or pay off the card balance.
Impact on your credit score
Once again, the impact on your credit score depends on the method chosen. In general, your score will suffer initially and then rebound as you establish responsible financial habits.
Consolidation: Any time you apply for a new credit account, your score will dip due to the hard inquiry. As you consistently make on-time payments on your new loan or balance transfer card, your score will go up. A positive payment history will negate any initial credit score drop.
Debt settlement: One of the significant disadvantages of debt restructuring is that it will hurt your score. You have to stop making payments, which is the worst thing you can do. If the creditor agrees, the settled debt is reported as a negative item on your credit report. This can further lower your score and remain on your credit report for up to seven years.
Debt management plans: Enrolling in a DMP typically requires closing your credit accounts. Closing accounts can hurt your score since it decreases your credit utilization ratio and length of credit history. However, as you make consistent payments, your score will improve. It typically ends up better than it was when you started the program.
Bankruptcy: Bankruptcy can cause your score to drop by 100 to 250 points and will stay on your report up to ten years. It will make it difficult to open new credit accounts in the future.
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Be aware of debt relief scams
Like with anything else, the debt relief industry has its share of scams. Common tactics include:
- Unsolicited offers: Be cautious of unsolicited phone calls, robocalls, or messages offering debt relief services. Legitimate companies typically do not reach out to consumers without their request or consent.
- Upfront fees: Scammers may ask for upfront payments or fees before providing any services. In many cases, it is illegal to request upfront payments.
- Guaranteed results: Be wary of anyone who guarantees specific results or makes unrealistic promises. No legitimate company can guarantee specific outcomes or immediate relief.
- Affiliation claims: Scammers may falsely claim to be affiliated with financial institutions, lenders, or government programs to gain trust. Debt relief companies are typically third-party service providers and are not affiliated with lenders.
- Lack of transparency: Unclear contracts or hidden fee structures are a sign of a scam. Legitimate companies are transparent about their services, fees, and the potential risks involved.
To protect yourself, research any company thoroughly before you sign up with them. Check for reviews with the Better Business Bureau (BBB) and verify the company’s legitimacy. Consider reaching out to consumer protection agencies like the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB) if you suspect a scam.
Alternative relief strategies
If none of those seem like the right fit, there are several alternative strategies to consider to get out of debt faster.
Increase your income: Taking on a second job, freelancing, or joining the gig economy can boost your income. Put the extra money towards paying off your debts.
Reduce expenses: Create a detailed budget and cut all non-essential expenses. This might involve lifestyle changes such as downsizing housing, eliminating subscriptions, or cooking at home more often.
Sell assets: Sell unused or valuable items. Electronics, jewelry, or even a second vehicle, can provide extra cash to cover bills.
Loans from family or friends: Borrowing money from loved ones at little to no interest can be a quick way to repay creditors. Ensure the terms are clear to maintain healthy relationships.
Financial hardship programs: Some creditors offer financial hardship programs that provide temporary relief. They may reduce interest rates, modify payment plans, or lower the minimum payment. These programs are typically designed for individuals facing financial difficulties.
Home equity options: If you own a home, consider tapping into your home equity. You can take out a home equity loan or line of credit at a low interest rate to pay off high-interest credit card debt.
Government assistance programs: Government programs can help with mortgages, utility bills, medical care, and more. Partaking in these programs – both state and federal – can free up funds to pay other bills.
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Are debt relief programs worth it?
Debt relief programs can be worth it if you’re struggling with overwhelming debt. They can help you regain control of your finances and become debt-free. The benefit of debt relief programs is that they help you repay what you owe more efficiently.
Be careful, though. Debt settlement is only worth it as a step before bankruptcy. Bankruptcy is sometimes a better choice since it is a legal process with protections in place. Do not simply move debt around with consolidation. You have to have a plan to pay it off. Debt management plans are one of the best options, but make sure you are not overpaying for the service.
Debt relief is worth it if it will help you pay off your debt and save money. If the program will not help motivate you to pay or does a lot of damage to your credit score, don’t bother with it.
Frequently asked questions
1. Do debt relief programs hurt your credit?
Debt relief programs usually hurt your credit score initially. Most involve missed payments, account closures, or settled debts reported negatively. Methods like debt settlement and bankruptcy cause the most severe, long-lasting impact. Debt consolidation and credit counseling tend to only have a temporary effect. Whichever option you choose, consistent on time payments and low balances will help your credit score recover.
2. Is National Debt Relief legit?
National Debt Relief is a legitimate debt settlement company that has been in business for over a decade. It is accredited by the Better Business Bureau (BBB) where it holds an A+ rating. National Debt Relief is a member of the American Association for Debt Resolution (AADR) and the International Association of Professional Debt Arbitrators (IAPDA). Membership ensures adherence to industry standards and best practices.
Bottom line
There are plenty of strategies to help you pay off what you owe effectively, from debt management to debt settlement. Think about what you can afford and how each method affects your credit score and financial health in the long term. Research companies to make sure anyone you work with is reputable. A good starting point is chatting with a nonprofit credit counselor with financial education. They can point you in the right direction.
Ultimately, the goal is to regain control of your personal finances and become debt-free. There are plenty of ways to get yourself back on the right track.
