Households in the US carry an average of $7,400 in consumer debt. Whether indebtedness comes from having to use credit after loss of a job, a large medical bill, or from years of overspending, there comes a time when bills outpace income and something has to give. No one sets out to have crushing debt payments, but unfortunately that’s how many people end up. Sometimes those in debt need outside help to manage their situation, but when should you consider adebt relief programs?
Can I Pay Off Debt on My Own?
Before consulting a debt relief agency, determine if it’s possible to pay off balances on your own. Is there a way to cut expenses or increase income enough to make payments more manageable? Credit card companies may work with you by lowering interest rates or it may be possible to transfer high interest balances to zero interest promotions.
Remember that promotional offers may charge a fee for balance transfers and there is usually a limited time period before interest rates go up. If you can’t pay off the balances in the allotted amount of time, or if your credit is not good enough to get interest rate reductions, it might be time to seek professional help.
Debt Consolidation vs. Debt Settlement
Debt relief agencies can offer several plans depending on your situation. The two most common are debt consolidation and debt settlement.
Debt consolidation happens when an agency negotiates with creditors to make payments more manageable, often with a lower interest rate. Clients make one payment each month or pay period to the debt agency who then pays your creditors. With this type plan, payment amounts are lower but the repayment period is increased. There is no reduction in the amount of debt owed, only a change in the terms of debt repayment so you can afford to cover what you owe without having to declare bankruptcy.
Debt settlementsoccur when you or an agency negotiates with creditors to accept a lump sum payment to settle your debt, usually for a much smaller amount than the overall balance. This type program only works if you have the cash on hand to actually pay the bill. Be careful that any lump sum payment isn’t going to leave you vulnerable to running up credit card balances again if an emergency pops up.
Most people who struggle with debt don’t keep a large amount of money sitting around, so the agency accepts monthly payments until your account balance is big enough to pay off the agreed settlement amount. However, there are some negatives that come with this type plan.
- When seeking debt settlement, companies will usually ask that you stop making payments. This can incur extra interest and penalties that might negate any savings gained in the settlement.
- Debt settlement will negatively impact your credit score.
- If you use an agency and miss a payment, the company might be able to keep your money.
- If a portion of your debt is forgiven, there could be tax consequences. Always consult a tax professional before taking a debt settlement.
No Plan Works Without Changing Behavior
No debt management plan works if you don’t change the behaviors that got you into trouble in the first place. To keep from spending more than you earn, it’s important to budget, track spending, and learn to save up for purchases if you don’t have the money to pay in full. It is possible to recover from debt, but you have to take control of your finances and work hard not to make the same mistakes that caused you to need a debt relief program.
Have you ever sought professional help to get out of debt?
Disclaimer: I was compensated for this post by Fast Track Debt Relief, but all opinions are my own.
Image: Flickr/MeddyGarnet
Written By
Snipon is owned and run by a small team who love to find deals on a dime along with the best sweepstakes and giveaways out there. We’re always scrolling the internet for the latest offers to share them with our community. Sign up for our weekly newsletter so you don’t miss another freebie!
5 Comments
Fortunately I have never needed to do it; however, I have had clients who have done it and regretted it. The worst case scenarios I have seen always seem to involve the for-profit debt relief companies.
I have asked help from a financial expert. It’s really worth doing as this would show the “real situation” and personally it let me see the way out of debt easily.
I think for some people a debt relief program is a good idea. When some people are in debt it’s hard for theme to see above all the money they owe and having someone create a plan out of the mess can be a great relief.
Honestly, I didn’t know that there is a debt relief program available. It’s perfect for the people who have had a hard time on their debt.
Thankfully no. But it’s good to know help is out there if needed.
Leave a Comment
FAQs
For example, you may need credit card debt relief if you're struggling to pay off credit card bills. Or you may be interested in debt consolidation if you have several types of debt to pay off. Credit counseling, debt management plans and debt settlement also fall under the debt relief umbrella.
When should you use a debt relief program? ›
Having multiple high-interest debts
If you're juggling multiple high-interest debts, such as credit cards, personal loans or medical bills, it might be time to consider a debt relief program.
Are debt relief programs worth it? ›
Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. "One of the biggest advantages of going through a debt relief program is the savings.
What are the disadvantages of a debt relief program? ›
Cons of debt settlement
- Creditors are not legally required to settle for less than you owe.
- Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score.
- Debt settlement companies can charge fees.
- If over $600 is settled, the IRS will view this debt as a taxable income.
A DMP may be a good option if the following apply to you: you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans. you'd like someone to deal with your creditors for you. making one set monthly payment will help you to budget.
Will debt relief programs hurt your credit? ›
Debt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose.
Can I still use my credit card after debt settlement? ›
While you can still use your open credit card accounts after debt consolidation, consumers should do so with caution. If you do use your credit card after debt consolidation, be sure to pay off your balance regularly.
What are the disadvantages of debt relief order? ›
Disadvantages
- A DRO will hurt your credit rating and remain on your credit file for 6 years.
- If your circ*mstances change within the 12 months, your DRO may be revoked and you'll have to look at new solutions to repay your debts. ...
- You can't apply if you've had a DRO or other form of insolvency within the last 6 years.
Debt settlement can eliminate outstanding obligations, but it can negatively impact your credit score. Stronger credit scores may be more significantly impacted by a debt settlement. The best type of debt to settle is a single large obligation that is one to three years past due.
What are the problems with debt relief? ›
Using debt settlement options to reduce debt comes with several risks, including late payments on your credit report, potential charge-offs, settlement company fees, tax implications on forgiven balances, possible scams and the overall risk of settlement offers not working.
Downsides of debt forgiveness
Forgiven debt of more than $600 may be considered taxable income, potentially resulting in a hefty tax bill. Engaging with debt relief companies could lead to additional fees, exacerbating financial difficulties.
Does debt relief need to be paid back? ›
And, depending on the program, you may be able to get your interest rate lowered or have certain fees waived. Under the terms of a debt management plan, while you may receive more favorable interest rates or relief from fees, you still repay the entire principal amount owed.
How much does it cost to use a debt relief program? ›
Here's a quick rundown of the costs you can expect, according to Investopedia research: Debt settlement companies: Typically 14% to 30% of your debt. Credit counseling agencies: Certain services are free, but a debt management plan typically costs from $0 to $35 to set up, with a monthly fee ranging from $0 to $75.
Which debts can t you pay off with a debt management plan? ›
While debt management plans can be effective tools for repaying your debt, they're not always the best strategy. For example, secured debts and student loans aren't eligible for debt management plans, and credit counseling agencies may cap how much debt you can have to participate.
Do it yourself debt relief pros and cons? ›
Understanding the Process of Debt Settlement
| Pros of DIY Debt Settlement | Cons of DIY Debt Settlement |
|---|
| Total control of the process | Total responsibility for the process |
| Potential faster repayment of debt | Requires more time, patience, effort, and negotiating skill than you may have at hand |
2 more rowsIf you're unable to make your payments, see if you can apply for a debt forgiveness program through your lender. If approved, a portion or possibly all your debt may be forgiven. Learn more about debt forgiveness and its potential consequences.
When should you seek help with debt? ›
Five signs that you may need professional help with your debts:
- The Minimum Payment Myth. ...
- Paying Credit with Credit. ...
- Relying On Credit to Make Ends Meet. ...
- Trouble Sticking to a Budget or Not Having a Budget. ...
- Having Little or No Savings to Manage Unexpected Expenses.
You'll typically need good credit and income to take out a debt consolidation loan or balance transfer credit card, for example, while most debt settlement companies require you to enroll at least $7,500 or $10,000 of debt to qualify.
What is the downside of freedom debt relief? ›
One drawback is that the company's fees range from 15% to 25% of the enrolled debt amount. So, if you're settling $15,000 in debt, you may have to pay between $2,250 and $3,750 in fees alone. You'll also have to pay a one-time fee of $9.95 to set up your account and a monthly fee of $9.95 for account servicing.
What is the point of debt relief? ›
Debt relief tools can change the terms or amount of your debt so you can get back on your feet more quickly. A debt relief program could involve: Wiping the debt out altogether in bankruptcy. Using a debt management plan to get changes in your interest rate or payment schedule.
