For millions of Americans struggling to make a living, debt can feel inevitable.
Taking on debt doesn’t necessarily have to be a bad thing. In fact, debt can be the first step toward financial growth and stability, like when you take out a mortgage to buy a home or use a student loan to pay for college.
But some types of high-interest debt, such as payday loans and credit card debt, can lead to a never-ending cycle of borrowing.
What’s Debt Relief?
If you have more debt than you can keep up with and monthly payments are starting to feel insurmountable, you may want to consider debt relief as an option to help lighten the load and avoid unfavorable outcomes like bankruptcy.
Debt relief is a catch-all term used to describe the different options for reducing debt. Certain types of debt relief may involve agreeing to a lower interest rate, converging several debts into one, or a creditor forgiving a portion of the debt.
As you can see, not all debt relief options are made equal – some may be a better or worse fit for your individual circumstances. Also, it’s not a given that you’ll qualify.
But with the right type of debt relief, you can get the help and breathing room needed to get back on track. This article takes a deeper look at the various types of relief programs available.
When Should I Seek Debt Relief?
Debt relief may be a great option if you:
- Live paycheck to paycheck
- Are making your monthly payments but don’t see an end in sight
- Have fallen far behind on credit card bills or other payments
- Feel incapable of managing your debts on your own
- Are facing serious consequences for unpaid debt, such as car repossession or home foreclosure
- Have considered filing for bankruptcy
Types of Debt Relief Options to Consider
The right debt relief option depends on factors such as the amount of debt you owe, the interest rates on your outstanding debts, and your overall credit.
That said, let’s take a closer look at 6 common options for debt relief, how they work, and how they can affect your finances:
- Debt Consolidation
This option involves merging multiple debts into one account.
How it works is you open up a new loan and use the funds from that loan to pay off your existing debts. Besides simplifying your finances, this debt-relief tactic can actually save you money if your new loan comes with a lower interest rate than the loans you plan to consolidate.
If your debt mostly consists of credit card bills, you can consolidate it using a balance transfer card with an introductory balance transfer APR of 0 percent.
To qualify for a debt consolidation loan, you need to first apply for new credit and meet the lender’s eligibility requirements. If you have a fair credit score, you can secure favorable terms for your new loan.
In the event that you do NOT qualify for reasonable interest rates, debt consolidation may not be an ideal route for you.
- Credit Counseling
If you have manageable debt and are willing to work on your spending habits, you can opt for the credit counseling route.
Here, you will meet with a credit counselor either physically or online to chat about your finances, budget, and debt. Working with an expert could lead to more options for reducing your debt.
To develop a personalized plan, they may thoroughly review your finances and take a deeper look into your debt and spending habits.
- Debt Settlement
A debt settlement company can help you negotiate a settlement with your creditors.
The company may advise you to stop making debt payments and instead direct that money into an account dedicated to paying settlements for your debts.
If you can settle your debt successfully, you may save money by paying less than the full balance you owe.
The only downside to this option is that you’ll likely notice a drop in your credit score if you stop making your payments.
- Debt Management Plans (DMPs)
If you choose to work with a credit counselor, one of the solutions they may suggest is a DMP.
A debt management plan lets you decide which debts to register within a program. Typically, you’ll make one monthly payment spread among your creditors per the plan’s terms.
A good thing about debt management plans is that you may not need to secure a loan to make this one payment.
You may negotiate a more favorable interest rate, and your credit score will improve as you pay down debt balances over time.
If you enroll in a DMP, the program may restrict you from applying for new credit. Debt management programs normally take 3-5 years to complete.
- Debt Forgiveness
If you have no means whatsoever to pay your debt, your creditor may be willing to cancel part or all of your debt.
Some lenders and loan servicers have special programs in place for consumers undergoing financial difficulty. For example, the DoE’s Public Service Loan Forgiveness Program and Servicemembers Civil Relief Act (SCRA) if you are active-duty military.
If you’re incapable of making your payments, check if you’re eligible for a debt forgiveness program through the creditor. If approved, part or possibly all of your debt may be forgiven.
But be wary of debt forgiveness scams. To avoid getting scammed, always work with a professional.
- Bankruptcy
If you don’t see any signs of being able to pay off your debt within 5 years, it could be time to explore bankruptcy.
Filing for bankruptcy can wipe out your debts, stop collectors’ calls, and give you a fresh start.
Bankruptcy is a legal process that’s initiated through federal court proceedings. Here, a payment plan is created (Chapter 13 Bankruptcy) or your assets are liquidated to pay creditors (Chapter 7 Bankruptcy).
Bankruptcy remains on your credit report for around 7-10 years. Due to the impact on your credit score, you may want to consider alternatives before resorting to bankruptcy.
Advantages of Pursuing Debt Relief
- Debt relief can help stop debt collector letters and calls.
- Free help is available if you’re unable to pay for debt relief services. Some nonprofits offer free credit counseling sessions.
- Debt consolidation or DMPs can reduce the amount of interest or monthly payments you make on your debt.
- Bankruptcy gives you a fresh start. A financial reset may be what you need to get your priorities in order.
Conclusion
If you’re one of the millions of American consumers struggling with high-interest debt, a debt relief plan may be just what you need to help you get your finances on track.
The many options available can overwhelm you, which is why you want to use a tried and true company for tailored advice.
At American Consumer Solutions™ , we’re debt experts. We will answer all your specific questions and even enroll you in a debt relief option that matches your needs.
