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Debt Relief: Know your options and the consequences
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Debt Relief: Understand Your Options and Consequences
Debt relief can help ease the burden of debt that is overwhelming, but it's not right for everyone. Here are options to explore.
By Bev O'Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O'Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She holds a bachelor's level degree in journalism from Auburn University and a master's in education from Georgia State University. Prior to joining NerdWallet she was employed by daily newspapers, MSN Money and Credit.com. Her work has appeared throughout the world in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and other publications. Twitter: @BeverlyOShea.
Updated January 7, 2023 at 1:32 PM PST.
Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years at The Oregonian in Portland in capacities such as chief of the copy desk and team editor and designer. Her previous experience includes news and copy editing at several Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor's in mass communications and journalism in the University of Iowa.
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Are you finding yourself not getting any progress on your debts, no matter how hard you try? If this is the case, you might be facing massive debt.
To break free of debt, you should look into your options to reduce debt. These tools can change the terms or amount of to help you recover more quickly.
But debt-relief programs are not the right solution for everyone, and it's crucial to consider the implications.
Debt relief can involve slicing the debt out altogether in bankruptcy, making modifications to your interest rate or schedule to make your payments lower or convincing creditors to agree to accept less than full amount owed.
If you are in debt, it is best to seek relief
Think about bankruptcy, debt management or debt settlement if any of these applies:
There is no way of paying off your non-secured debt (credit cards medical bills or personal loans) within five year, even though you make drastic efforts to reduce expenses.
The amount of your unpaid debt must be at least half of your income.
On the other hand, if you could potentially repay your unsecured within five years, you should consider a DIY strategy. It could comprise a combination of debt consolidation and appeals to creditors, as well as more strict budgeting.
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Be aware of scams, debt relief downside
The sector of debt relief includes fraudsters that are eager to grab whatever little cash you have. Many who sign up for debt relief programs fail to follow through with the program. They could be left with debts that are even more than you were when you began.
However, debt relief could give you a fresh start, or the breathing space you'll need to get real results.
You must be aware ofand confirm these points before entering any contract:
What are the requirements to be qualified.
What are the fees you'll have to pay.
What creditors are getting paid and what is the amount? If your debt is in collections, make sure you know who is the owner of the debt so payments go to the appropriate agency.
The tax implications.
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Relief from debt through bankruptcy
There's no point in signing an agreement for a debt settlement or a debt management strategy in the event that you won't be able to make the payments as agreed. We suggest speaking with a first, prior to embarking on any debt relief strategy. Initial consultations are usually cost-free, and if you're not eligible it is possible to switch to different alternatives.
The most commonly used form of liquidation, Chapter 7 liquidation, can erase the majority of credit card debts, unsecured personal loans and medical debt. It is possible to complete the process within three or four months, depending on whether you qualify. You should be aware of:
It will not erase obligation to pay child support as well as the student loan debt is highly unlikely to be forgiven.
It can be detrimental and remain in your credit file for up to 10 years while you try to rebuild your credit history. However, when your credit is already bad, a bankruptcy may allow you to rebuild your credit much sooner than continuing to try to pay back. (Learn more about bankruptcy .)
If you've made use of a , your bankruptcy filing will render the cosigner accountable for the amount owed.
If your debts keep adding up, you won't be able to make another application for up to eight years.
This may not be the best option if you would have to sell the property you would like to keep. The rules are different for each state. In general, certain types of property are exempt from bankruptcy, like vehicles with a specified value and part of the equity in your home.
It may not be necessary in the event that you're "judgment proof," which means you don't have any income , or property that creditors can go after. However, creditors are still able to sue you and get a judgment, but they won't be legally able to take the money.
Also, not everyone who has a lot of debt is eligible for. If your income is higher than the median for your state and family size, or you have property you'd like to save from foreclosure You may have to apply for Chapter 13 bankruptcy.
It is a three- or five-year plan of repayment that has been approved by a court, based on your income and debts. If you're able to adhere to the plan throughout its period, any remaining unpaid debt will be discharged. This process will be more time-consuming than a Chapter 7 bankruptcy, however, if you're in a position to make payments (a large majority don't) you are eligible to keep the property. The Chapter 13 Chapter 13 bankruptcy stays on your credit report for seven years from the filing date.
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Relief through debt management strategies
A permits you to pay off your debts that are not secured -- typically credit cards -fully, but often at a reduced interest rate or with fees that are waived. The only payment you make is every monthly to an credit counseling company that distributes the money among your creditors. Credit counselors and credit card firms have agreements that are long-standing that help customers with debt management.
Credit card accounts will be shut and, typically you'll need to go without credit cards until you complete the plan. (Many people don't complete the plan.)
Debt management plans themselves do not affect your credit scores But closing accounts may hurt your scores. Once you've completed the plan it is possible to apply for credit once more.
Missing payments can knock you out of the program, though. It is important to choose an agency that's accredited by the the . But, it is important to ensure you know the charges and the options you have to deal with financial debt.
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Assistance through debt settlement
is the last option for people with a lot of debt but cannot qualify for bankruptcy or want to file bankruptcy.
Debt settlement companies typically ask you to stop making payments to your creditors and deposit the funds into an escrow account. Every creditor is contacted as the money is accumulated in your account, and you become further behind on payments. The fear of receiving nothing even a single cent could cause the lender to make an offer that is smaller in lump-sum and then agree to not take the remainder.
In the event that you don't pay your bills, it could result in collections calls, penalties and, possibly, legal actions against you. The debt settlement process stops all of that while you're still negotiating. It could take months for settlement offers to start. Based on the amount that you have to pay, it can be years long and ongoing instalments further erode the credit rating.
You could also be faced with taxes due on the forgiven amounts (which the IRS is able to count as income). Legal actions can result in tax liens on property and wage garnishments.
You can try , or you can employ an expert. The debt settlement business is rife with scammers However, The Consumer Financial Protection Bureau, the National Consumer Law Center and the Federal Trade Commission caution consumers in the most stern phrases.
Some of those companies also claim to be . They are not. Debt consolidation is something you can accomplish yourself and will not damage your credit.
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Do-it-yourself debt relief
There's nothing to say that you cannot borrow from any of the options for debt relief and then create your own debt relief plan.
You can follow the same steps credit counselors use in debt management strategies: Call your creditors, explain why you're behind, and then what concessions you'll need in order to get caught up. The majority of credit card companies offer programs for hardship and may be willing to cut the rate of interest and even waive charges.
You can also educate yourself about debt settlement and reach an agreement by contacting creditors yourself. (Learn how to do this .)
If the debt you have isn't insurmountable alternatives to paying off debt may be accessible. If, for instance, your credit score remains excellent, you might be eligible to apply for an account with a 0% balance transfer rate that could allow you to breathe. Also, you could find a card one with a lower rate of interest.
These options shouldn't harm your credit score, as long as you make the monthly payments and your credit score will be able to recover.
If you decide to go down this route but you're in debt, it's crucial to establish a strategy to prevent running up your again. It can also be difficult to qualify for a new card or loan when you are deeply in debt. That frequently leads to late payments or high balances, which can affect your credit standing.
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What should you avoid doing
Sometimes, debts become overwhelming and come with devastating swiftness -- a health crisis or unemployment, or even natural disaster. Maybe it was in small increments, and now collection agencies and creditors insist on paying the bill, but you're unable to.
If you're experiencing financial stress There are some tips you should avoid:
Don't neglect a secured debt (like the car loan) to pay an unsecured one (like a hospital bill or credit card). You could lose the collateral used to secure that debt, in this case your vehicle.
Don't take out loans against the equity in your home. Your home is at risk of foreclosure and could be converting unsecure debt that can be eliminated in bankruptcy into secured debt that isn't.
Don't withdraw money from your account . This cuts your chances of an financially secure retirement.
Think twice about borrowing money from retirement accounts at work as well. If you lose your job, the loans can become inadvertent withdrawals and result in the tax penalty, which is the last thing you'll need.
Do not make your decisions based on which collectors pressure on you most. Instead, study your options and pick the one that is best for your needs.
Are you ready to take on your debt?
Keep track of your spending and balances in one place to see your way out of the debt.
Author bio Bev O'Shea was a credit reporter at NerdWallet. Her work has been featured on the New York Times, Washington Post, MarketWatch and elsewhere.
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