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Debt Relief: Learn your options and the consequences
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Debt Relief: Learn your options and the consequences
Debt relief can ease the burden of a massive debt However, it's not the best option for everyone. There are options for you to consider.
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 degree in journalism from Auburn University and a master's in education from Georgia State University. Prior to joining NerdWallet, she worked for the daily papers, MSN Money and Credit.com. Her work has been featured on The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and many other places. Twitter: @BeverlyOShea.
Updated January 7, 2023 at 1:32 PM PST.
Written by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years at The Oregonian in Portland in roles including copy desk chief and team director of design and editing. Prior experience includes copy and news editing for several Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor's in journalism and mass communications from The University of Iowa.
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Table of Contents
Are you finding yourself not making progress on your debt regardless of how hard you try? If so you could be dealing with an overwhelming amount of debt.
To get rid of debt, consider the options for debt relief. These tools can change the terms or amount of so you can recover faster.
But debt-relief programs are not the best solution for everyone, and it is important to know the potential consequences.
Debt relief can involve slicing the debt completely out through bankruptcy, obtaining adjustments to your interest rate and payment schedule to lower your payments; or persuading creditors to agree to accept less than entire amount owed.
When should you seek debt relief
Consider bankruptcy, debt management , or debt settlement when one of these is true:
You're not likely to succeed in repaying unsecured debt (credit cards, medical bills and personal loans) within five year, even though implement drastic measures to cut expenditure.
The total of your unpaid unsecured debt equals half or more of your total income.
On the other hand If you are able to repay your debt within five years, consider a self-help strategy. That could include a combination of debt consolidation and appeals to creditors, as well as more strict budgeting.
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Beware of scams, the negatives of debt relief
The debt relief industry includes scammers who are eager to grab whatever little cash you have. Many who sign up for the debt reduction programs do not finish their obligations. You could end up with debts that are more than you were when you began.
The debt relief program could offer you a fresh start or the breathing space you need to finally achieve real progress.
Be sure you understand -and verify these points before entering any agreement:
What you need to qualify.
What are the fees you'll have to pay.
Which creditors are receiving payments and what is the amount? If your debt is placed in collections, be sure you understand who owns the debt and that the payments go to the right agency.
The tax consequences.
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Relieving debts through bankruptcy
There's little point in entering an agreement to settle your debt or entering into a debt management plan when you're not likely to be able pay the amount you've agreed to. It is recommended to speak with someone first prior to pursuing any strategy to reduce debt. Consultations are generally free, and if you don't qualify then you are able to move on to other alternatives.
The most common form of , Chapter 7 liquidation, can erase most credit card debts, unsecured personal loans and medical debt. It can be done in three or four months, depending on whether you qualify. What you should know:
It will not erase support obligations for children, and students loan debt is highly unlikely to be forgiven.
It will hurt and stay on your credit report for as long as 10 years even as you work to restore your credit rating. But, if your credit score is already poor bankruptcy could allow you to rebuild your credit faster than continuing to try to pay back. (Learn more about when .)
If you've made use of a , your bankruptcy filing makes the co-signer accountable for the amount owed.
If the debts keep piling up, you can't apply for a new loan for the next eight years.
It might not be the right option in the event that you must sell the property you would like to keep. The rules vary by state. Typically, certain kinds of property are not subject to bankruptcy, for example, vehicles that exceed a certain value as well as a part of the equity of your home.
It may not be necessary if you're "judgment proof," which means you do not have any income or property that a creditor could go after. However, creditors are still able to pursue you and obtain a judgement, but they won't be legally able to get their money back.
Additionally, not every person who has a lot of debt is eligible for. If your income is higher than the median of your state and the size of your family, or you have a home you want to keep from being a foreclosure target You may have to apply for Chapter 13 bankruptcy.
It is a three- or five-year repayment plan that is approved by the court that is based on your income and other debts. If you're able stay on the plan for its full duration, the rest of your unsecured debt is discharged. It'll take longer than the Chapter 7 bankruptcy, but if you are in a position to make payments (a most people can't) you are eligible to keep your property. Chapter 13 bankruptcy Chapter 13 bankruptcy stays on your credit report for seven years following the filing date.
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Assistance through debt management strategies
A lets you pay off your debts that are not secured -- typically credit cards -fully, but typically at a lower cost or fees that are waived. It is a one-time payment each month to a credit counseling agency, which distributes it among your creditors. Credit counselors and credit card firms have agreements that are long-standing in place to assist debt management clients.
Your credit card accounts will be closed and, typically, you'll have to be with no credit card until you complete the plan. (Many people don't complete their plan.)
Debt management plans themselves do not affect your credit scores But closing accounts may hurt your scores. After you've completed the program it is possible to make a new application for credit.
Insufficient payments could take you out of the plan but. It is important to choose an agency that's accredited by the or the . Even then, make sure you are aware of the costs and what alternatives you may have for dealing with the debt.
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Assistance through debt settlement
is a last resort option for those who face overwhelming debt, but aren't eligible for bankruptcy, or don't want to declare bankruptcy.
The companies that negotiate debt typically request you to stop paying your creditors and instead place the money into an account called an escrow. Each creditor is approached as the money accumulates in your account, and you get further behind on your payments. A fear of not getting anything at all may motivate the creditor to take a smaller lump-sum offer and then agree to not take the remainder.
Paying your bills late could result in collection calls, penalty charges and even legal action against you. The debt settlement process stops all of that while you're still negotiating. It could take months for settlement offers to begin. Depending on how much your debt is, this process could take years , and the continual payment lateness can further harm your credit score.
You could also be faced with tax bills on forgiven amounts (which the IRS counts as income). Legal actions can result in the garnishment of wages and property liens.
You can attempt to do it yourself, or employ a professional. 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 them also declare themselves to be . They're not. Consolidating debt is something you can do yourself and will not affect your credit.
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Do-it-yourself debt relief
There's nothing to say that you shouldn't take advantage of any of the debt relief options , and make your own personal plan.
You can take the steps that credit counselors use in debt management plans: Contact your creditors, explain why you're in debt and what concessions you'll need in order to make in order to catch up. Many credit card companies offer special programs for those in need, and they may be willing to lower your interest rates and waive charges.
You can also educate yourself about debt settlement and reach an agreement with creditors by calling them yourself. (Learn how to .)
If your debt isn't unsurmountable alternative debt-payoff strategies might be possible. For example, if your credit score remains good, you may be able to apply for credit cards that offers a zero-interest balance transfer program that will give you some breathing room. Also, you could find a card one with a lower rate of interest.
Those options won't hurt 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 plan a strategy to prevent getting into a cycle of debt. It also can be hard to be eligible for a new credit card or loan when you are deeply in debt. That frequently leads to late payments or high balances and those hurt your credit standing.
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What is not to do
Sometimes, debts become overwhelming and come with devastating swiftness like a health crisis, unemployment or an natural catastrophe. Perhaps it happened slowly, and the collection agencies and creditors are pressing you to pay but you can't.
If you're experiencing financial stress There are some tips NOT to be doing:
Don't neglect a secured debt (like the car loan) to settle an unsecure one (like hospital bills (or credit card). It is possible to lose the collateral that secures that credit, in this case your vehicle.
Don't take out loans against the equity in your home. You're putting your home at risk of foreclosure and you may be turning unsecure debt that can be eliminated in bankruptcy into secured debt that isn't.
Do not take money out of your account . This will reduce the chance of a financially secure retirement.
Think twice about borrowing money from retirement accounts at work as well. If you lose your job, the loans could be withdrawn in error and result in the tax penalty that is not the best thing you'll need.
Don't make decisions based on the collectors who are threatening on you most. Instead, take time to research your options and choose the one that is best for your needs.
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Author bio Bev O'Shea worked as a writer for credit at NerdWallet. Her work has been featured in the New York Times, Washington Post, MarketWatch and elsewhere.
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