Debt relief: Is this a good idea or not?
But it’s not a quick fix. It is a long-term strategy that can help you get rid of your debt over a longer period of time. Usually, it takes several years.
Although debt relief programs can make it easier for you to manage your payments, they may not be right for you. It is crucial that you understand the details of each program and how they can affect your finances.
How does debt relief work?
A variety of options are available to reduce your monthly payments so that you can become debt-free. This could include a replacement loan that lowers the interest rate, modifies the repayment term, or even a reduction in total debt. You can make specific modifications depending on which solution you choose.
Once you have decided on the right debt solution for you, it is important to follow the terms and make payments in accordance with the agreement.
There are many types of debt relief
When it comes down to debt relief, there’s no one size fits all. You will need to consider your current credit, how much debt you have and what interest rates you are paying on it.
Let’s take an in-depth look at some of these more popular types of debt relief.
- Consolidating debt
- Credit counseling
- Management of your debt
- Settlement of Debt
- Debt forgiveness
Debt consolidation combines multiple debts into a single, new account. Instead of making multiple monthly payments to your existing accounts, you only need to make one monthly payment in order to repay the consolidation loan or balance transfer.
For a loan consolidation, you will need to apply for credit and meet eligibility requirements. If you have poor credit, it may be hard but not impossible.
A balance transfer card is a good option to consolidate debt that is mostly credit card-related. The introductory balance transfer rate APR on balance transfer credit cards is often 0%, which can be appealing for a short time. This option is not available to everyone, just like with any new credit account.
You need help choosing the right option for you. With our comparison of balance transfers vs personal loans, we have you covered.
Credit counselors can help you manage your finances, money management, and credit. After reviewing your finances, a counselor will create a plan that addresses your specific financial needs. Although credit counseling is usually provided by non-profit organizations, it’s not always free. So make sure you check before you meet with a counselor.
Learn more about the benefits of credit counseling.
One of the options a credit counselor may recommend is a debt management program, or DMP. You only pay one monthly fee to credit counseling organizations when you sign up for a DMP. Based on the agreement it makes with creditors, the organization uses the money to repay your debts.
While your total debt won’t change significantly, your credit counselor may be in a position to negotiate lower interest rates or waivers. A DMP will require you to agree not to apply for credit again while you are enrolled in it. It is important that you review any changes made by the DMP and confirm them with your creditors.
Learn more about debt management.
Settlement of Debt
In order to settle your debts at a lower rate than you owe, debt settlement firms negotiate with creditors and collectors. This may seem like a good option, but there are some drawbacks.
Your creditors may not agree to settle your debt. However, even if creditors agree to settle your debt, these companies may advise clients that they stop paying their debts and instead use the money to pay off settlements. You should follow this advice and stop paying your debts. Not only will you have an increase in your account balance but also the interest and late fees that will accrue, and can cause a serious damage to your credit.
Learn how debt settlement works, and what to avoid.
A lender may forgive a portion or all of your debt. Sometimes, a debt settlement company can negotiate a lower lump payment to help you resolve your debt. The lender may allow you to negotiate forgiveness of debt.
You can also find lenders and loan servicers who offer special programs for people in financial difficulties. You may be eligible for a loan servicer’s debt forgiveness program if your financial situation is not stable. If you’re approved, you may be eligible to have a portion or all of your debt forgiven.
Learn more about debt forgiveness.