Debt relief options range from debt settlement, debt consolidation, and debt management to credit counseling, bankruptcy, and do-it-yourself programs. These debt relief options are designed to deal with a wide variety of debt problems, namely credit card debt, student loan debt, debt from medical bills, and other types of unsecured debt. Because every person has a unique debt situation, your choice might be completely different from your friend or family member's choice of debt relief company. You need to first understand the different options and then look into companies to pinpoint the perfect partnership for you. To get the best help for your burdensome debts, you should also consider the type of debt you owe, the amount, your credit score, and your financial ability to make monthly payments. All of these factors are considered by debt professionals when designing plans for you to progress on the road to financial freedom. Weigh the various debt relief options against your personal financial situation to be able to choose the best debt relief company. Remember, the best debt relief companies will have experience in dealing with creditors, the ability to help you with any type of unsecured debt (credit card debt, student loan debt, etc.), and will have fewer fees than other debt negotiation companies.
Debt consolidation is a general term used to describe combining multiple payments from different creditors into one monthly payment. It is important to note that debt settlement companies sometimes claim they are debt consolidation companies. Though they allow you to make one monthly payment rather than pay multiple creditors, the key difference is that they seek to settle your debts for less than you owe. Typical debt consolidation companies help you pay your debts in full with a lower monthly payment.
There are many ways to consolidate your debt; however, debt consolidation companies tend to offer one of two services. The first is a debt management plan (DMP). This service is offered by credit counseling agencies. The second method is a personal loan. Some companies offer "debt consolidation loans," however this is often just another term for a personal loan. While debt consolidation is highly beneficial, it does rely on your personal responsibility. Debt consolidation is designed to help you change spending habits, and because of this, many customers do not fully complete the process.
There aren't many downsides to debt consolidation, which is why it remains one of the most sought after methods of debt relief for customers. Take a look at the pros and cons of debt consolidation with a debt management plan:
Using a loan to consolidate debt offers may similar pros; however, the savings are dependent on the terms of the loan. Your creditworthiness is a large factor in interest rates and may not provide you with substantial savings.
Debt settlement is the process of negotiating with your creditors for a lower overall debt amount. Usually, consumers work with a debt settlement company to plan the best approach. Those who find themselves deep in debt with few or no other debt relief options will find debt settlement a life-saving option.
The process typically begins with a free consultation with the company to discuss your financial situation, debt amount, and creditors. The company then makes a payment plan based on your situation. Over several months, you deposit a set amount into a specific savings account. Rather than paying your creditors, you place money into this account to build up a lump sum. Once you have enough money saved, the debt settlement company will negotiate with your creditor, trying to convince them to settle your debt for the accrued amount. If debt settlement is successful, it can lower your total debt amount, saving you thousands of dollars. Rather than paying your full balance, you may end up paying only 50 percent. Also, once a settlement is reached, you are completely finished with that particular creditor.
Customers should know that debt settlement can hurt your credit score. Since you place money into a savings account rather than pay your creditors, your debts will become delinquent. Your score will drop during the process. Additionally, your debt will be marked “Settled” rather than “Paid in full” on your credit report.
Not all creditors are willing to negotiate, and they have no legal obligation to settle. If they are willing to settle, the terms are up to their discretion, therefore you may only save a small amount. Also, if you work with a debt settlement company, it often charges a percentage of your enrolled debt, which may also limit your savings. Though it is unlikely, you could be sued by your creditors. The settlement process can take two to four years to settle all of your debts. Finally, if you save over $600, you may be taxed on your forgiven debt. The only way to avoid this is if you are insolvent, i.e. your liabilities exceed your assets.
Every debt relief company should offer a free consultation before you are required to sign anything. During this consultation, there are a number of things you need to find out to determine whether to choose the company in question. Refer to these suggestions when preparing for your free consultation:
Ask about the client-representative relationship. It is better to work with the same person throughout the debt relief process to allow for a more personal relationship and avoid mistakes in your debt case. In some cases, companies randomly assign customers to different debt professionals for each consultation.
Ask about projected prices for your case. Debt settlement companies will charge you a percentage of your enrolled debt (usually between 15 and 25 percent). If you owe $20,000 total in debt and your debt relief company saves you $10,000 but also charges 25 percent of your enrolled debt, you will end paying $10,000 to your creditors and $2,500 to the debt relief company. On the other hand, debt consolidation companies charge a monthly management fee for their debt management plan services. This fee varies by company and state.
Ask about all possible debt relief options. Though your debt relief professional might suggest one course of action, you need to be aware of all your options. Make sure your representative is open with you about your options.
How will debt relief affect my credit score and report?
It depends on if you choose debt settlement or debt consolidation. Debt settlement can lower your score but it does bounce back much faster than it would if you declared bankruptcy. If you opt for debt settlement, your debts will be marked as "settled" instead of "paid in full" on the credit report. If you decide to go with debt consolidation, there is usually an increase on your credit score as you pay off your debts. If you complete the entire program, your debts are paid in full.
How long will it take to pay off all my debt?
With debt settlement, you can usually pay off all of your debts within 24 to 48 months. With debt consolidation, it could be anywhere between 3 to 5 years.
What are the tax consequences of debt relief?
If you settled your debts for less than you owe, you may have to pay taxes on saved money over $600. However, if you are insolvent (have more debts than assets), you don't have to pay this. If you still are not convinced of debt relief due to possible tax penalties, try asking about it during your free consultation or research debt relief taxes further.
How do I know if a company is legitimate?
If a company is FTC compliant and accredited by professional organizations such as the AFCC, IAPDA, NFCC, etc., chances are it is a legitimate company. With these accreditations, companies are held to higher standards and company employees receive another level of training in debt relief strategies, often leading to higher customer satisfaction. If you do not trust these accreditation organizations alone, you can look at each company's social media comments (which usually house complaints/praises for most companies). To take your research a step further, review the top debt relief companies and their respective debt relief reviews.
Do I need to take out a loan to pay off my debts?
No. It is one of the more popular options, but you need a good credit score to qualify for a low-interest rate. If you really want to stick with a debt consolidation strategy that doesn't require you to have a high credit score to take out a loan, you can go with a credit counseling agency that provides debt management plans (DMPs) as opposed to a loan. Debt settlement is another option that does not require you to get a loan.
How do I know if debt settlement or consolidation is right for me?
This will depend greatly on your current financial situation. You will have to answer a few questions before finding the right option. For example, how much debt do you currently have? Are you close to paying it off? Is your debt delinquent? If you are falling behind on your payment and are unable to pay the full balance of your debt, debt settlement may be a good option for you, especially as an alternative to bankruptcy. On the other hand, if your accounts are still current, you want to protect your credit and your assets, and you want more manageable monthly payments, then debt consolidation is a great option. Take advantage of the free consultation offered by each company to discover which option is best. If you want to get a closer look at your options with debt consolidation, you can take this personal debt quiz.
Are all debt relief companies the same?
Not exactly. Most debt relief companies claim to provide all debt relief services but most have specialties. For example, a credit counseling agency can provide you with debt management plans while companies that focus on debt settlement probably don't offer DMPs. Additionally, some debt relief companies are non-profit while others are for-profit.
Can I pay off my debts on my own?
Yes, there are many do-it-yourself methods, but most people need help to navigate the complexities of debt relief strategy. Additionally, you may find savings on your own, but you are much more likely to cut a greater number of debts with the help of a debt relief expert.
Is debt relief better than bankruptcy?
Debt relief is usually a better option than bankruptcy. More specifically, debt consolidation is much better than bankruptcy, but the real question is whether to use debt settlement as opposed to bankruptcy. Bankruptcy can decrease your credit score 160 to 220 points and can stay on your credit report for 10 years.
What types of debt can I enroll in these programs?
Most companies only offer programs that accept unsecured debt (credit card debt, some student loan debt, unsecured personal loans, etc.). However, there are a very limited number of companies that do provide debt relief services for secured debt. You will have to talk to each company for details on which types of debt can be enrolled.