If you’re drowning in consumer debt, you may feel like you’ll never get back on your feet. In cases of extreme financial hardship, some people turn to consumer debt relief.
While you might have heard of “debt relief help” or “debt management services” before, these are actually catchall terms for various forms of debt relief.
It’s important to understand that there are distinct differences between the various programs that fall under this general heading.
More importantly, it’s critical to be wary of potential scams. Unfortunately,consumer debt relief is an industry plagued by unscrupulous companies that promise assistance they can’t deliver.
Before signing up, read some consumer debt relief reviews to thoroughly explore your options. In short, there are basically four options for dealing with extreme debt:
- Debt management
2. Debt settlement
3. Do-It-yourself debt relief
Keep in mind that none of these options are a magic wand, and none will erase your debt with zero consequences.
Let’s take a look at each debt relief option, including the potential pros and cons.
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What Are Consumer Debt Management Services?
When you research consumer debt management service, you’ll most often see it referred to as a “debt management plan”. There are several reputable companies that offer debt managements services to consumers.
On the downside, there are also scammers who take advantage of desperate individuals. Before signing on with any debt management service, it’s important to make sure you’re working with a respectable organization.
Even if you work with an honest, reliable company, you will pay a fee for debt management. Prices vary, but most fall within the range of $25 to $75 per month.
Most people who enter into debt management services have mostly unsecured debt — usually in the form of credit cards. With a debt management plan, you keep making payments toward your debts, but the company negotiates a lower interest rate on your behalf, so you end up paying less in the long run. In some cases, they can also negotiate a waiver of certain fees.
Instead of paying each creditor separately, debt management services require you to make a single monthly payment to them. From there, the company handles distributing your payments to each creditor.
When you go for this type of debt solution service, you will no longer have access to your credit cards. In most cases, the terms of the plan require you to cancel and close your cards, which means you can’t make any new charges.
While this by itself won’t damage your credit score, canceling your credit cards can hurt your score by shortening the length of your credit history and hurting your credit utilization (the ratio of how much available credit you have versus how much you’re currently using).
If you think a debt management services are a good fit for you, there are companies affiliated with the Financial Counseling Association of America or the National Federation for Credit Counseling. Both of these organizations work with companies that employ professional credit counselors.
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What Are Debt Settlement Programs?
You are probably wondering whether debt settlement is a good idea; Generally speaking, consumer debt settlement is a bad idea.
In sharp contrast to debt management companies, the vast majority of debt settlement companies fail to deliver on their promises. In many cases, working with one of these companies will land you in worse financial shape than you started.
Debt settlement programs require you to stop paying your creditors altogether. Instead, you must send a monthly payment to the company, which holds your payments and lets them accumulate until they reach a certain lump sum.
While this may sound similar to a debt management plan, it’s not the same thing. Unlike companies that offer debt management services, loan settlement companies do not pay your creditors on your behalf.
Instead, they hold your money until they feel they have enough to make a lump sum settlement offer to your creditors. The idea is to “settle” or pay off your debt in a single chunk.
The problem with this approach is that it hinges on the debt settlement company’s ability to persuade your creditors to negotiate. Keep in mind that your creditors are under no obligation to reduce your debt or accept a lump sum payment.
Additionally, ceasing payments on a credit card or other account will result in late fees and missed payments that appear on your credit report. Even a handful of missed payments can seriously damage your credit score.
In a worst case scenario, your creditors could turn you over to collections, which will further damage your score. They could also take legal action against you.
While you might see some debt settlement services advertised as “debt consolidation,” debt settlement isn’t the same thing as consolidating your debts.
Consolidating your debt involves combining multiple credit card debts, and consumer high-interest loans, into one monthly payment.
The reality is that you need a debt consolidation loan to combine all your debt. One of the effects of debt consolidation is that, it may be challenging to get consolidation services for unsecured loans.
If you’re interested in this form of debt relief, a do-it-yourself debt management strategy might be for you.
If you’re committed to paying off your debt and taking charge of your finances, you can certainly do it on your own. However, this will take research and discipline on your part.
Just like a debt management company, you can call your creditors and attempt to negotiate a lower interest rate. Explain that you’re dealing with financial hardship and don’t want to fall behind on your payments.
Depending on the creditor, you may need to provide proof of your financial difficulties.
Many credit card companies have financial hardship programs, and they are typically open to working with account holders who demonstrate a genuine need for assistance.
If you plan on asking for a reduced interest rate, don’t wait until you’ve missed a payment. The sooner you contact your creditors, the better.
Another option is to transfer some of your debt to a low interest credit card. Many credit card companies offer balance transfer cards that let you pay 0% interest for a certain period of time — typically one year. After the year is up, however, the interest rate can be quite high.
As you might imagine, this option isn’t a great fit for everyone. It works best when you have a good handle on what you owe and you’re certain you can afford to make monthly payments while your credit card terms are favorable.
If you fail to stick to your plan, you could end up paying sky-high interest fees that make your financial situation worse.
How do Personal Bankruptcies Work?
Bankruptcy is an option when your debt is out of control, but you should only use it as a last resort. It’s also best to consult with a lawyer for bankruptcy. An experienced bankruptcy attorney can review your debts and let you know if you qualify.
A reputable lawyer will tell you if there’s a better option for your situation, as bankruptcy is an extreme form of debt relief you shouldn’t undertake unless your finances are truly dire.
For consumers, there are two types of bankruptcy available: Chapter 7 and Chapter 13. To qualify for Chapter 7, which is a liquidation (erasure) of your debts, you must meet certain income requirements.
If you make too much money to qualify for Chapter 7, you might have to file for Chapter 13, which requires you to enter a payment plan.
For most people who find themselves in serious financial distress, Chapter 7 is the goal. This is because a Chapter 7 liquidation will wipe out most if not all unsecured debt (including credit cards), medical debt, and any personal loans.
However, there are limits to what Chapter 7 can do for you. For example:
- Student loans debt is almost never dischargeable.
- Child support arrears can’t be discharged.
- Any co-signer on loans will automatically be responsible for the debt they co-signed.
- You will most likely be permitted to keep your home, as well as your primary vehicle. However, it’s unlikely you will be allowed to keep a second vehicle.
Perhaps the biggest drawback to bankruptcy is that it does serious damage to your credit score, instantly dropping it by hundreds of points. Additionally, the bankruptcy will stay on your credit report for 10 years.
While it’s possible to recover and rebuild from bankruptcy, it takes time and hard work. If you truly can’t manage your bills, bankruptcy can be a way to wipe your financial slate clean and get a fresh start.
Are There Any Government Debt Relief Programs?
The federal government doesn’t sponsor any form of debt relief program. If you see a company advertise itself as being affiliated with some kind of government debt relief program, this is most likely a scam.
However, the federal government does offer debt forgiveness or reduction for certain types of government debt. For example, if you have a significant amount of tax debt, you may qualify for reduced or forgiven debt by enrolling in an IRS payment plan.
As with all of debt relief solutions, the internet is full of tax debt relief scams. If you need to negotiate relief from federal income tax debt, contact the IRS directly or consult with a reputable taxation attorney.
Is Debt Relief a Good Idea?
With the possible exception of do-it-yourself strategies, no debt relief solution is a quick or easy fix. When it comes to debt relief, there are no shortcuts — and you should be wary of any company that promises you one.
There are debt relief pros and cons, solutions like a debt management services will cost you monthly fees you might be better off applying toward your debts. If you opt for bankruptcy, your credit score will suffer and you’ll likely have a hard time getting credit for several years.
On the other hand, some circumstances call for debt relief help. In certain cases, opting for a form of debt relief is the only way to get control of your debt. You should consider help if any of the following apply:
- Your total debts exceed your income, and even drastically cutting your spending doesn’t help you afford basic household expenses like groceries.
- You are in danger of defaulting on credit cards or loans.
- If you’re disciplined and willing to learn about budgeting, you might be able to slash your expenses and set up a do-it-yourself debt relief plan on your own.
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On the other hand, a debt management services or bankruptcy might be better options depending on your circumstances.