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Debt Relief: Know your options and the consequences

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Debt Relief: Understand Your Options and the Consequences

Debt relief can help ease the burden of debt that is overwhelming however it’s not suitable for all. Here are some options to think about.

By Bev O’Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O’Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She has a bachelor’s level education in journalism at Auburn University and a master’s in education from Georgia State University. Prior to joining NerdWallet she was employed by newspaper publishers, including daily ones, MSN Money and Credit.com. Her work was featured throughout the world in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and elsewhere. Twitter: @BeverlyOShea.

Jan 7, 2023

Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years working at The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Prior experience includes news and copy editing at several Southern California newspapers, including the Los Angeles Times. She earned a bachelor’s degree in mass communication and journalism at The University of Iowa.

Many or all of the products featured here are provided by our partners who pay us. This influences which products we write about and where and how the product appears on the page. However, this does not influence our opinions. Our opinions are our own. Here is a list of and .

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Table of Contents

You’re not getting any progress on your debts regardless of what you do? If so then you may be in the middle of massive debt.

To break free of this financial burden, consider your options to reduce debt. These tools may alter the terms or amount of so you can recover faster.

But these programs aren’t the ideal solution for everyone, and it’s crucial to consider what the potential consequences could be.

Debt relief could involve wiping off the debt in bankruptcy; obtaining adjustments in your interest rate or payment schedule to make your payments lower or convincing creditors to to accept less than the total amount due.

When should you seek debt relief

Take into consideration bankruptcy, debt management or debt settlement when either of these applies:

There’s no chance of resolving your debts unsecured (credit cards or medical bills or personal loans) in the next five years, even if take extreme measures to cut spending.

The total of your unpaid debt is equal to half or more of your gross income.

However If you are able to pay off your debt in five years consider a do-it-yourself strategy. That could include a combination of debt consolidation appeals to creditors, and more strict budgeting.

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Beware of scams and negative effects of debt relief

The debt relief industry includes scammers who are eager to grab whatever little cash you have. Many people who enter debt relief programs fail to complete them. It is possible to end up having debts that are more than you were when you began.

But debt relief may give you a fresh start or the breathing room you’ll need to achieve real progress.

Be sure you understand — and verify — these points before entering any contract:

What you need to qualify.

What fees will you have to be required to pay.

Which creditors are receiving payments and at what amount; If your debt is placed in collections, ensure you know who is the owner of the debt, so that payments are made to the right agency.

The tax implications.

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Debt relief through bankruptcy

It’s not worth entering an agreement for a debt settlement or a debt management program if you’re not going to be able to pay as you’ve agreed to. We recommend talking with a first, before you embark on any strategy to reduce debt. Initial consultations are often free, and if you don’t qualify then you are able to move on to other alternatives.

The most commonly used form of liquidation, Chapter 7 liquidation, can erase the majority of credit card debt, unsecure personal loans and medical debt. The process can be completed in three or four months depending on your eligibility. The things you need to know:

It will not erase child support obligations as well as the student loan debt is highly likely to be paid back.

It could be detrimental to your credit and will remain on your credit report for up to 10 years while you try to rebuild your credit history. If your credit is already bad it is possible that bankruptcy will enable you to repair your credit faster rather than attempting to repay. (Learn more about when .)

If you’ve made use of a , your bankruptcy filing will render the cosigner accountable for the obligation.

If the debts keep piling up, you won’t be able to apply for a new loan for the next eight years.

This may not be the best option if you would have to sell the property you would like to keep. The rules vary by state. In general, certain types of property are exempt from bankruptcy, such as vehicles up to a given value, and a portion of the equity in your home.

It may not be necessary if you’re “judgment proof,” which means you don’t have any income , or property a creditor can go after. However, creditors are still able to pursue you and obtain a judgement, but they won’t be legally able to take the money.

Additionally, not every person with a large amount of debt can qualify for. If your earnings are above the median for your state and your family size or you own an asset you wish to avoid foreclosure You may have to apply in Chapter 13 bankruptcy.

It is a three- or five-year repayment plan that is approved by the court determined by your income and debts. If you’re able adhere to the plan throughout its duration, the rest of your unsecured debt will be discharged. This process will take longer than the Chapter 7 bankruptcy, however, if you’re capable of making your payments (a large majority can’t), you will get to keep your home. Chapter 13 bankruptcy Chapter 13 bankruptcy stays on your credit report for seven years following the filing date.

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Assistance through debt management programs

A lets you pay off your debts that are not secured -usually credit cards- in full, but usually at a lower rate of interest or with fees waived. It is a one-time payment each per month, to the credit counseling organization and it distributes it to your creditors. Credit counselors and companies have longstanding agreements that help debt management clients.

Credit card accounts will be closed and, typically you’ll be forced to be with no credit card until you’ve completed the plan. (Many people do not complete their plan.)

Debt management plans themselves do not affect your credit scores However, closing your accounts could harm your score. Once you’ve completed your plan, you can apply for credit once more.

If you don’t pay on time, you could be kicked out of the plan, but. And it’s important to pick an agency that’s accredited by the or the . However, you must ensure that you understand the fees and what alternatives you may have to deal with debt.

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Relief through debt settlement

is a last resort for those with a lot of debt, but aren’t eligible for bankruptcy or want to file bankruptcy.

Companies that offer debt settlement typically ask you to stop paying your creditors , and instead put the money in an Escrow account. Each creditor is approached in the same way as the money is accumulated in your account, and you get further behind in payments. Fear of getting nothing at all may motivate the creditor to accept an offer that is smaller in lump-sum and then agree to not seek to pursue you for the rest.

Not paying your bills can result in collections calls, penalty charges and, possibly, legal actions against you. Debt settlement stops none of that , even though you’re in negotiations. It can take months for the settlement offers to begin. Depending on how much that you have to pay, it may take years and the continued payment lateness can further harm the credit rating.

You could also be faced with tax charges on forgiven amounts (which the IRS counts as income). Lawsuits can lead to the garnishment of wages and property liens.

It is possible to try it make it happen, or hire a professional. The debt settlement business is full of bad actors, though; it is recommended that the Consumer Financial Protection Bureau, the National Consumer Law Center and the Federal Trade Commission caution consumers in the most stern terms.

Some of them also declare themselves to be . They are not. Debt consolidation is something you can accomplish yourself and won’t affect your credit.

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Do-it-yourself debt relief

There’s nothing to suggest that you shouldn’t take advantage of any of the above-listed debt relief options , and make your own plan.

You can follow the same steps credit counselors do in their debt management plans: Contact your creditors, explain why you’re in debt and what concessions you’ll need to make to make in order to catch up. Many credit card companies offer special programs for those in need, and they may be willing to reduce your interest rate or waive fees.

You could also learn on debt settlement and then negotiate an agreement with creditors yourself. (Learn how you can .)

If your debt isn’t unsurmountable alternative debt-payoff strategies might be possible. If, for instance, your credit score is satisfactory, you may be able to get an account that offers a zero-interest balance transfer program that will provide you with some breathing room. Also, you could find a card with a lower interest rate.

These options shouldn’t harm your credit; provided you keep making the monthly payments your credit score will improve.

If you choose to do this However, it’s essential to have a plan that can stop you from getting into a cycle of debt. It also can be hard to qualify for new credit cards or a loan in the event that you’re heavily in debt. That is often the reason for missed payment or high balances which can affect your credit score.

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What is not to do

Sometimes overwhelming debt comes in a frenzied speed like a health crisis, unemployment or an natural catastrophe. Perhaps it happened in small increments, and now collection agencies and creditors are pressing you to pay the bill, but you’re unable to.

If you’re experiencing financial stress, here are some things to avoid:

Be sure to not neglect a secured obligation (like a car payment) to settle an unsecure one (like hospital bills credit or hospital bill). It is possible to lose the collateral that secures that credit, in this case your vehicle.

Do not borrow against the equity in your home. You’re putting your home in danger of going into foreclosure, and you could be turning the debt you are unable to pay off and could be wiped out through bankruptcy, into secured loans that can’t.

Don’t take money from your . This cuts the chance of having an financially secure retirement.

Consider avoiding borrowing money from your retirement account at work and. If you are fired, the loans can become inadvertent withdrawals and result in taxes that is not the best thing you want to happen.

Do not make your decisions based on which collectors are pressuring you the most. Instead, take time to look into your options and select the best one for your needs.

Are you ready to get rid of your debt?

Monitor your balances and spend all in one place to track your way out of debt.

About the author: Bev O’Shea is a former credit writer at NerdWallet. Her work has been featured in the New York Times, Washington Post, MarketWatch and elsewhere.

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