Debt relief is a process that helps people reduce or eliminate their debts. It is typically done through negotiation with creditors, though it can also be achieved through other methods such as bankruptcy and debt management programs.
Regardless of the method chosen, debt relief helps individuals improve their financial situation and get their lives back on track. However, it is important to understand the different types of debt relief options available before choosing a solution for your specific needs.
Credit Counseling
Nonprofit credit counseling agencies offer free initial consultations and basic budgeting help to help you figure out your debt-relief options. They may offer debt consolidation services that will combine all your loans and credit card balances into one monthly payment, which is typically lower than your current interest rates and fees.
If your debt is greater than 43% of your income, you should consider a debt management program. These programs are designed to help you pay off your debt in a 3-5 year time frame, with monthly payments tied to a budget that is tailored to your income and spending habits.
Another common debt-relief option is a debt settlement company. These companies negotiate with your creditors on your behalf, often offering to settle your debts for less than the amount you owe in return for a lump sum of money.
The fees that a debt settlement company charges are usually between 15% and 25% of the amount they settle your debts for. In some cases, they also charge additional fees for setting up your account and for providing certain debt relief services.
In some cases, the debt settlement company will work with your creditors on your behalf to obtain reduced payment amounts or even eliminate the debt entirely. It is possible to work with several debt settlement companies in order to maximize the amount you can save and get a better deal, but it is best to choose only one.
Forbearance
In addition to negotiating with your creditors, debt settlement companies can also request that your accounts be placed on a forbearance plan. This will prevent your account from being sent to collections or referred to a collection agency, and it can also save you money on late fees, interest rates and other fees that are associated with these accounts.
This is a great option for those who are struggling with debt, but it does have its drawbacks, such as affecting your credit score and negatively impacting your ability to borrow money in the future. If you decide to use this type of debt-relief method, it is vital that you understand how it will affect your credit report and score before signing on with a debt settlement company.
Bankruptcy
A bankruptcy filing can cause a serious decrease in your credit score, which can make it difficult to borrow money or secure a job. In fact, a bankruptcy will stay on your credit report for 10 years and can damage your credit scores by as much as 250 points.