Debt Relief Options: Pros and Cons
If you’re struggling with debt, you may have started to research different debt relief programs. There are a lot of options available these days, and they each offer something different. It can be tough to know where to start when choosing which debt relief program will work best for you. This blog will review a few of the most common debt relief paths so that you can make an informed decision about which one might be right for you.
Why should I consider debt relief?
Debt relief is the process of reorganizing or restructuring your debt to make it more manageable. This could look like a new repayment plan, securing reduced fees and interest rates, consolidating multiple debts into one place, or even having a portion of your debt forgiven. This can help relieve stress and allow you to start living your life again. In most cases, debt relief helps get debtors back on their feet. You’ll be able to stop worrying about debt collectors and start living your life again without the stress of wondering how you’ll handle your debt.
Sounds great. What are the downsides?
There are also some cons to debt relief. Depending on what method you choose, you could be subject to extra fees which will increase the amount of debt you have. In addition, some forms of debt relief could have long-lasting negative impacts on your credit score, which can make it harder to qualify for large purchases in the future. So, it’s important to consider both your short-term needs and long-term goals when selecting debt relief.
What types of debt relief are there?
Debtors can consider several debt relief options. A few of the most common ones include: credit counseling, debt consolidation, debt management, debt settlement, and bankruptcy. Making the right choice for your circumstances can be a complex process, so debtors should research their available options and weigh pros versus cons before committing.
With debt counseling, individuals will work with debt relief experts to gather their debt information and create a plan for debt repayment that fits within the debtors’ financial situation. Then, the counselor will advise the debtor on how to follow through on this plan. This type of debt relief is suitable if you can afford to pay back all of what you owe but need help creating a plan to make it happen.
The main advantage of credit counseling is that debtors can work with professionals who know how to create a plan that fits the debtors’ financial situation.
This type of debt relief isn’t great for people in serious debt, as it doesn’t offer any substantial benefits, like reducing the amount they’re required to pay back. It can also take longer than other methods, such as debt settlement, and results aren’t guaranteed.
Debt consolidation means combining all your debt into one loan, typically resulting in a single monthly payment. This type of debt relief is excellent for people who simply want an easier, more streamlined way to pay back multiple outstanding debts.
The main advantage to this type of debt relief is that you’ll only be making a single monthly loan payment, instead of trying to juggle multiple payments to various creditors. Depending on your credit score, you could also qualify for a lower interest rate on this new loan. This could help save you money in interest if you’re approved for a lower interest rate than your current loans or credit cards.
The downside to debt consolidation is that consolidation loans can be hard to qualify for if you don’t have good credit (See: What is a good credit score?). And, if you do qualify, you might be approved for an amount that’s less than what you need to cover all of your outstanding debts. It’s important to note that debt consolidation does not reduce the debt you’re required to repay–it simply restructures it. You also will want to take into account origination fees which typically will add 3-5% to what you’ll pay.
With the debt management option, a debt management company negotiates with creditors to lower your interest rates or create a new repayment plan for you. They will then take direct control of all payments, so you don’t have to worry about it.
The primary benefit of debt management is that you could benefit from lower interest rates and reduced fees. You’ll also only have to make one monthly payment.
Debt management does not reduce the amount you’re required to pay back. So, your monthly payments might increase as your debt manager tries to shorten your repayment period to resolve your debt faster. With a debt management plan, you’ll also be subject to program fees.
Debt settlement is the process of negotiating with creditors to settle your debt for less than what you owe.
One of the biggest benefits of debt settlement is that you could reduce the amount of debt you’re required to pay back by up to half or more. This means your monthly payment is likely to be more affordable than with other options and you could be debt-free faster. Another huge benefit: Debt settlement companies will negotiate with your creditors for you, using their experience and power with creditors to save you even more time, money, and stress.
Debt settlement could have an initial negative impact on your credit score. However, your credit rating may ultimately rebound due to the resolving of your debts. It’s also not an immediate fix, but is typically faster than other debt relief methods. Experienced debt settlement companies could help you become debt-free in as little as 24-36 months.
Bankruptcy occurs when an individual or a business goes to court and seeks to have all or a portion of their debts forgiven. The two types of bankruptcy an individual might file for are known as Chapter 13 and Chapter 11 bankruptcy.
The main advantage of bankruptcy is that you could have all or a portion of your debt “forgiven.”
There are quite a few serious drawbacks to consider. One big downside to bankruptcy is that it could stay on your credit report for about 10 years, potentially impacting your ability to make large purchases, take out new loans, or open new credit cards. It will also have additional fees associated with it, including administrative and attorneys’ fees. Finally, some forms of bankruptcy allow creditors to try and get back part of what you owe them by forcing you to liquidate (or sell off) assets such as your home.
Who benefits from debt relief?
Debt relief can help anyone who is feeling overwhelmed by debt. It’s especially valuable if you find yourself struggling to meet your debt obligations because of unexpected expenses.
How can CreditAssociates help?
Our debt consultants could help you keep more money in your pocket each month and obtain the financial freedom you deserve by negotiating with your creditors to reduce your overall debt. Sound interesting? Try our debt relief calculator, to see how much you could save, or give us a call today for a free, no-obligation consultation.
More Common Debt Relief Questions:
Are Debt Relief Programs Worth It?
Debt relief programs can be worth it if you’re struggling to make your current monthly payments, or you feel like you’re not making progress paying down your debt. Read more on the best debt relief programs.
How does a debt relief program affect your credit?
A debt relief program can positively impact your credit by helping reduce your debt load and eventually resolve it altogether. However, it can also potentially cause harm to your credit for a period of time while you work to negotiate and resolve any current debts. The impact on your credit could vary depending on which method you choose so it’s important to weigh your options and priorities before choosing.
Should I pay a collection agency?
Before paying a collection agency, we recommend consulting with a debt relief professional. They can analyze your situation and let you know the best course of action.
Debt settlement is a form of debt relief that is aimed at reducing the amount of debt you’re required to pay back. When working with a debt settlement company, they handle all of the negotiations for you. If you receive a call from collectors while working with a debt settlement company, let them know so they can handle it.
Are there any scam debt relief programs?
There are many legitimate debt relief programs, but—like in any industry—there are also a few scammers. That’s why it’s essential to do your research on any debt relief company to make sure they’re reputable. A few general ways to tell if a debt relief company is legitimate: they provide a FREE consultation upfront to determine how they can help your specific situation, they charge NO upfront fees, and they will never ask you to share sensitive information such a bank account, social security number, credit card number, etc. via email, text or other electronic messaging.
How do I begin to get out of debt if I’m completely broke?
The best way to start if you’re broke is to do a free consultation with a certified debt consultant, in order to find the right plan for you moving forward.
If you cannot afford to pay back what you owe, debt settlement might be a good option for you. Learn more about how debt settlement works here.