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Debt Relief: Understand Your Options and Consequences

 

 

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Debt Relief: Understand your options and the consequences

 

Debt relief can ease the burden of debt that is overwhelming however it's not suitable for all. Here are some options to think about.

 

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 journalistic studies from Auburn University and a master's in education from Georgia State University. Before coming to NerdWallet she worked for the daily papers, MSN Money and Credit.com. Her work was featured 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 1:32PM PST

 

 

 

Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years working at The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Her previous experience includes copy and news editing for many Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communication and journalism from Iowa's University of Iowa.

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

 

 

 

 

 

You're not making progress on your debts, no matter what you do? If so, you might be facing massive debt.

 

To free yourself from this financial burden, consider your debt relief options. These tools may alter the terms of or the amount so you can recover quicker.

 

But debt-relief programs are not the ideal solution for everyone. Moreover, it is important to know the implications.

 

Debt relief could involve wiping the debt completely out through bankruptcy, obtaining adjustments to your interest rate or payment schedule to lower your payments or convincing creditors to to accept less than the entire amount owed.

 

If you are in debt, it is best to seek relief

 

 

 

Think about bankruptcy, debt management , or debt settlement when one of these is true:

 

You have no hope of paying off unsecured debt (credit cards, medical bills, personal loans) within the next five year, even though take extreme measures to cut spending.

 

The sum of your unpaid unsecured debt must be at least half of your total income.

 

 

On the other hand, if you could potentially pay off your debt in five years, consider a self-help plan. This could consist of a mix of debt consolidation, appeals to creditors and stricter budgeting.

 

From top to bottom

 

 

Beware of scams, debt relief downside

 

 

 

The industry of debt relief is full of fraudsters who want to take what little money you have. Many who sign up for the debt reduction programs do not complete them. It is possible to end up having debts that are bigger than when you started.

 

The debt relief program could offer you the new start or the breathing space that you require to finally achieve real progress.

 

Make sure you are aware of -and verify these points prior to entering into any contract:

 

What are the requirements to be qualified.

 

What are the costs you'll be paying.

 

Which creditors are receiving payments, and how much; If your debt is in collections, ensure you understand who owns the debt, so that payments are made to the correct agency.

 

The tax consequences.

 

 

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Relief from debt through bankruptcy

 

 

 

There's little point in entering an agreement for a debt settlement or a debt management strategy when you're not likely to be able to pay as the terms agreed upon. It is recommended to speak with a first, prior to pursuing any debt relief strategy. Initial consultations are often cost-free, and if you don't qualify then you are able to move on to alternative options.

 

The most popular type of , Chapter 7 liquidation, can erase most credit card debt, unsecure personal loans and medical debt. The process can be completed within three or four months, if you are eligible. What you should know:

 

It won't erase or obligation to pay child support, and the student loan debt is highly unlikely to be forgiven.

 

It can be detrimental and remain on your credit report for as long as 10 years while you try to rebuild your credit score. If your credit is already in bad shape it is possible that bankruptcy will enable you to repair your credit faster rather than attempting to pay back. (Learn more about when .)

 

If you've used a , your bankruptcy filing makes the co-signer responsible for the obligation.

 

If debts continue to pile up, you can't make another application for up to eight years.

 

It may not be the best option in the event that you must give up property you want to keep. The rules vary by state. Most of the time, certain types of property are exempt from bankruptcy, like vehicles with a specified value, and a portion of the equity of your home.

 

It may not be necessary when you're "judgment proof," which means you don't have any income , or property that creditors can take on. The creditors can still be able to sue you and receive a judgement, but they won't be in a position to collect.

 

 

Also, not everyone with a large amount of debt can qualify for. If your income is above the median for your state and your family size or you have a home you want to save from foreclosure and you are in need of a loan, you might have to make an application to file Chapter 13 bankruptcy.

 

It is a three- or five-year court-approved repayment plan, based on your income and financial obligations. If you are able to stick with the plan throughout its period, any remaining unpaid debt is discharged. It will be more time-consuming than a Chapter 7 however, if you're able to keep up with your payments (a majority of people can't) then you'll be able to keep your property. A 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 lets you pay off your debts that are not secured -- typically credit cards -- in full, but usually at a lower cost or fees that are waived. It is a one-time payment every per month, to the credit counseling agency that distributes the money among your creditors. Credit card and credit counselor firms have agreements that are long-standing that help people with debt.

 

Your credit card accounts will be shut and, most of the time, you'll have to go with no credit card until you've finished the plan. (Many people don't complete their plan.)

 

The plans for managing debt do not impact your credit score But closing accounts may harm your score. Once you've completed the plan, you can make a new application for credit.

 

Missing payments can knock you out of the plan however. Also, it's crucial to select an agency that is accredited by the or the . But, it is important to ensure you are aware of the costs and other options you could have to deal with debt.

 

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Relieved through debt settlement

 

 

 

is the last option for people who are in a state of overwhelming debt, but aren't eligible for bankruptcy or simply don't want to file bankruptcy.

 

Companies that offer debt settlement typically ask you to stop paying your creditors and instead put the money in an Escrow account. 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 accept an offer that is smaller in lump-sum and not pursue you for the rest.

 

In the event that you don't pay your bills, it could cause collections calls, penalty fees and, possibly, legal action against you. Debt settlement stops none of that , even though you're bargaining. It can take a long time before the settlement proposals start. Depending on how much your debt is, this process could take years and the continued late payments further damage the credit rating.

 

There is also the possibility of taxes due on forgiven amounts (which the IRS considers income). The law suits can result in the garnishment of wages and property liens.

 

It is possible to try it make it happen, or employ an expert. The industry of debt settlement is rife with scammers however, it is recommended that the Consumer Financial Protection Bureau, the National Consumer Law Center and the Federal Trade Commission caution consumers with the most severe of phrases.

 

Some of those companies also claim to be . They're not. Consolidating debt is something you can handle yourself and won't harm your credit score.

 

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Do-it-yourself debt relief

 

 

 

There's no reason to think that you shouldn't take advantage of any of the above-listed options for debt relief and then create your own debt relief plan.

 

You can take the steps that credit counselors do in their debt management strategies: Call your creditors, explain why you fell behind and what concessions you'll need to make to catch up. Many credit card companies offer hardship programs, and they may be willing to lower the interest rate and eliminate charges.

 

You could also learn on debt settlement and then negotiate an agreement with creditors yourself. (Learn how to do this .)

 

If the debt you have isn't insurmountable, more traditional debt-payoff strategies may be possible. For example, if your credit score is satisfactory, you might be able to apply for an account with a 0% balance transfer rate that could give you some breathing room. You could also find a credit card one with a lower rate of interest.

 

Those options won't hurt your credit score so long as you pay the monthly payments and pay them on time, your credit score should rebound.

 

If you choose to do this but you're in debt, it's crucial to plan a strategy that will prevent you from running up your again. It can also be difficult to get an additional credit card or loan in the event that you're heavily in debt. That is often the reason for missed payments or high balances which can affect your credit standing.

 

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What is not to do

 

 

 

Sometimes, debts become overwhelming and come with a devastating speed such as a health issue, unemployment or an natural catastrophe. Or maybe it came a little at a time, and now collection agencies and creditors insist on paying the bill, but you're unable to.

 

If you're feeling overwhelmed by debt, here are some things you should avoid:

 

Do not ignore a secured loan (like the car loan) in order to pay an unsecured one (like hospital bills (or credit card). You could lose the collateral used to secure that debt, which is in this instance your car.

 

Do not borrow against the equity of your home. Your home is at risk of being foreclosed upon and you may be turning the debt you are unable to pay off and could be wiped out in bankruptcy, into secured credit which is not able to.

 

Don't withdraw money from your account . This cuts the chance of an financially secure retirement.

 

Think twice about borrowing money from workplace retirement accounts in addition. If you lose your job the loans could result in accidental withdrawals and trigger a tax bill, which is the last thing you need.

 

Do not make your decisions based on which collectors pressure you the most. Instead, you should look into your options and select the most appropriate one to suit your needs.

 

 

Are you ready to take on your debt?

 

Monitor your spending and balances in one spot to help you see how you can get rid of the debt.

 

 

 

 

 

 

 

 

 

Author bio Bev O'Shea is a former credit writer at NerdWallet. Her work has been featured in the New York Times, Washington Post, MarketWatch and elsewhere.

 

 

 

 

 

 

 

 

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