If you are seeking debt relief, it is important to be aware of the aspects of debt relief and whether it is a good option for you. Entering debt forgiveness can provide some financial relief and show you how to exercise better debt management, especially when you have debt with high interest. Getting help with your debt problems has become increasingly popular in the United States over recent years.
One study has reported the average American household has about $131,143 in debt. Learning how to get out of debt is crucial to starting a financially free life. There are many options for relieving your debt, so it is essential to find which ones will help with your financial situation.
When to Seek Debt Relief
Debt settlement can be helpful to those who have high amount of debt. If you can pay your debt with better spending habits, then you are better off making those changes. Debt relief plans are not an easy fix. It is good to consider the aid of debt settlement programs when you know that you cannot pay off your unsecured debt within five years, even if you were to take extreme measures to do so. You should also seek relief from debt if the total of your unpaid secured debt equals half or more of your gross income.
Create a do-it-yourself plan, which can include a combination of these strategies if you know it is possible to pay off your debt in five years:
- Debt consolidation
- Appeals to creditors
- Stricter budgeting
Types of Debt Relief Programs
These programs allow the borrower to speak with a financial professional to speak to creditors to relieve their debt. These financial professionals can show you how to get out of debt by providing a plan to manage it. These companies will charge a fee for their service, often a percentage of the amount you saved on the settled debt.
For example, if you are someone who has credit card debt with high interest rates, a credit counseling program may suit your situation. The counselor may suggest a credit consolidation loan in order to combine several debts to one monthly payment.
Other common types of debt relief programs are credit card debt settlements, income-based plans, and bankruptcy. Some management plans also help provide financial relief and financial counselors often suggest these plans. The function of each program will vary depending on the debt. However, every debt assistance program can have its downsides.
Credit Card Debt Settlement
Credit card debt settlement is when a lender agrees to accept less than the full balance of the debt. The borrower will then pay off the debt in fewer, lump sum payments. This type of debt relief is suggested to borrowers with poor credit.
One benefit of this type of debt relief programs is that you can pay off your debt for less. However, settling your debt will negatively impact your credit score for years. Pausing your debt payments can also have a negative effect on your credit score. Stopping debt payments over a long period of time can also cause your debt to become collections accounts.
This debt relief program is for good for college graduates who may have not found a job yet or do not make enough to cover the minimum payments. The U.S. Department of Education will provide repayment options depending on your income level and family size. Monthly payment for an income-based plan is a percentage of the income of the borrower. One aspect to be wary of is that the lower payment and longer repayment periods can result in paying more interest.
If you have not finished paying your student loans at the end of the repayment period, which is 20 to 25 years, the remaining loans are forgiven. Additionally, income-based debt relief plans only apply to federal loans, so borrowers with non-federal student loans will have to seek other options.
Bankruptcy is related to mortgage debt and, depending on how unmanageable your debt is, there are a few types of debt relief options. Chapter seven bankruptcy will require you to liquidate some assets to pay lenders. Chapter 13 bankruptcy is another form that allows you to keep your property, but you must pay monthly towards your debt for a three- to five-year period. After this time period, the lenders will discharge the debt.
There are also additional costs to managing debt with Chapter 13 such as paying off a lawyer, completing mandatory credit counseling with a government-approved organization. Bankruptcy can assist with debt but impact you credit score, so it is important to make sure to do research before making a final decision.
What to Know Before Getting Help With Debt
Many debt companies promise to alleviate borrower’s debt problems for a fee. Before signing contracts and send that debt company the money, check the Better Business Bureau rating for the company. Always come prepared with questions, and if they do not meet your expectations, walk away. There are debt relief programs that scam borrowers of their money, putting them further into debt and decreasing their credit score.
Companies should provide transparent, time-sensitive goals to your debt settlement. They should provide several options to you, not just a debt settlement or debt management plan. Remember to take time to think about your options.
Another action to take is to weigh the pros and cons of getting help with debt. Decide whether you can afford to pay taxes on the debt that is forgiven or charged, consider the payoff dates for the debt and any accompanying costs. Make sure that you have found the most financially viable option for you.
Other factors to consider when you need help with debt through programs include the following:
- The requirements for the programs
- The required fees
- What lenders will be paid
- How much they will be paid
- The tax implications
If your debt is at a collection agency, make sure that you know who owns that debt so you can make the right repayments.