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Debt Relief: Know the options available and the consequences

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Debt Relief: Learn your options and the consequences

Debt relief can ease the burden of a massive debt However, it’s not the best option 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 degree in journalism from Auburn University and a master’s in education from Georgia State University. Prior to joining NerdWallet, she worked for daily newspapers, 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 other publications. Twitter: @BeverlyOShea.

Jan 7, 2023

Edited by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Her previous experience includes news and copy editing for several Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in journalism and mass communications from The University of Iowa.

A majority of the products featured here are provided by our partners who pay us. This impacts the types of products we feature and where and how the product is displayed on the page. But, it doesn’t influence our evaluations. Our views are our own. Here is a list of and .

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Find that you’re just not getting any progress on your debts no matter what you do? If this is the case then you may be in the middle of an overwhelming amount of debt.

To free yourself from debt, look into your options to reduce debt. These tools can alter the terms or amount of to help you be back on track more quickly.

But these programs aren’t the best solution for everyone, and it is important to know what the implications could be.

Debt relief may involve wiping off the debt in bankruptcy; obtaining adjustments on your interest rates and payment schedule to make your payments lower or convincing creditors to agree to pay less than the entire amount owed.

When you should seek debt relief

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

There’s no chance of paying off unsecured debt (credit cards, medical bills, personal loans) within five years, even if implement drastic measures to reduce expenditure.

The sum of your unpaid debt equals half or more of your total income.

However If you are able to pay off your debt in five years, consider a self-help plan. This could consist of a mix of debt consolidation, appeals to creditors and more disciplined budgeting.

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Beware of scams, the negatives of debt relief

The debt relief industry includes fraudsters who want to grab whatever little cash you have. A lot of people who enroll in debt relief programs do not complete the program. It is possible to end up with debts that are bigger than when you started.

But debt relief may give you a fresh start, or the breathing space you need to finally achieve real progress.

You must be aware ofand confirm these points prior to entering into any agreement:

What are the requirements to be qualified.

What are the fees you’ll have to have to pay.

Which creditors are receiving payments and at what amount; if your debt is in collections, make sure you know who is the owner of the debt, so that payments are made to the correct agency.

The tax consequences.

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Relieving debts through bankruptcy

There’s little point in entering an agreement for a debt settlement or a debt management program in the event that you won’t be able to make the payments as you’ve agreed to. We suggest speaking with a first, before you embark on any strategy to reduce debt. Consultations are generally cost-free, and if you’re not eligible it is possible to switch to different possibilities.

The most commonly used form of , Chapter 7 liquidation, can erase most credit card debt, unsecured personal loans and medical debt. It is possible to complete the process in three or four months if you qualify. The things you need to know:

It won’t erase or child support obligations or students loan debt is extremely likely to be forgiven.

It can be detrimental and remain the credit score for as long as 10 years, even while you work to restore your credit rating. If your credit score is already poor bankruptcy could allow you to rebuild your credit sooner instead of trying to pay back. (Learn more about when .)

If you’ve made use of an unsecured loan, filing bankruptcy will render the cosigner accountable for the amount owed.

If debts continue to pile up, you aren’t able to make another application for up to eight years.

It may not be the right option in the event that you must sell the property you would like to keep. The rules are different for each state. Typically, certain kinds of properties are exempt from bankruptcy, like vehicles up to a given value, and a portion of the equity in your home.

It’s not necessary in the event that you’re “judgment proof,” which means you don’t have any income , or property that a creditor could take on. However, creditors are still able to be able to sue you and receive a judgement, but they won’t be able to take the money.

Also, not everyone who has a lot of debt is eligible for. If your income is above the median for your state and the size of your family or you own a home you want to keep from being a foreclosure target and you are in need of a loan, you might have to file for Chapter 13 bankruptcy.

It is a three- or five-year repayment plan that is approved by the court, based on your income and debts. If you are able to stay on the plan throughout its duration, the rest of your unsecured debt is eliminated. This process will be more time-consuming than a Chapter 7 — but if you are in a position to make your payments (a majority of people are not) then you’ll be able to keep the property. A Chapter 13 bankruptcy stays on your credit report for seven years following the date of filing.

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Relief through debt management plans

A lets you pay your unsecured debts -usually credit cardsfully, but often at a reduced interest rate or with fees waived. It is a one-time payment each month to a credit counseling organization and it distributes it to your creditors. Credit counselors and firms have agreements that are long-standing in place to help customers with debt management.

Your credit account will be shut and, typically you’ll need to live in a debt-free state until you complete the plan. (Many people do not complete their plan.)

The debt management plans themselves will not impact your credit scores, but closing accounts can harm your score. Once you’ve completed your plan you are able to apply for credit again.

Missing payments can knock you out of the program, but. And it’s important to pick an agency that’s accredited by the the . Even then, make sure you know the charges and what alternatives you may have to deal with financial debt.

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Relieved through debt settlement

is the last option for those who face overwhelming debt but cannot qualify for bankruptcy or want to declare bankruptcy.

The companies that negotiate debt typically request 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 fall further and further behind on your payments. Fear of getting nothing at all may motivate the lender to make a smaller lump-sum offer and agree not to take the remainder.

In the event that you don’t pay your bills, it could cause collections calls, penalty charges and even legal action against you. Debt settlement will not stop any of that while you’re still negotiating. It can take several months for the settlement to be implemented. In the case of how much that you have to pay, it could take years and the continued instalments further erode your credit score.

You may also face tax charges on forgiven funds (which the IRS considers income). The law suits can lead to the garnishment of wages and property liens.

You can attempt to do it yourself, or you can employ an expert. The debt settlement business is riddled with bad actors However, the Consumer Financial Protection Bureau, the National Consumer Law Center and the Federal Trade Commission caution consumers in the most stern words.

Some of them also claim to be . They’re not. Debt consolidation is something you can do by yourself, and it will not affect your credit.

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Do-it-yourself debt relief

There’s nothing to say you can’t borrow from some of the debt relief options , and make your own debt relief plan.

You can take the steps that credit counselors do in their debt management plans: Contact your creditors, and explain to them why you’re behind, and then what concessions you’ll need to make to make in order to catch up. Most credit card companies have special programs for those in need, and they may be willing to cut your interest rate or waive fees.

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

If the debt you have isn’t insurmountable, more traditional debt-payoff strategies could be accessible. If, for instance, your credit score is still excellent, you might be able to get a credit card with a 0% balance transfer rate that could provide you with some breathing room. Or you may find a one with a lower rate of interest.

These options shouldn’t harm your credit score as long as you make the payments your credit score will rebound.

If you go this route but you’re in debt, it’s crucial to have a plan that can stop you from running up your again. It’s also difficult to get new credit cards or a loan when you are deeply in debt. That frequently leads to late payment or high balances which can affect your credit score.

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What not to do

Sometimes, debts become overwhelming and come in a frenzied speed — a health crisis or job loss or a natural disaster. Perhaps it happened a little at a time but now collection agencies and creditors are pressing you to pay the bill, but you’re unable to.

If you’re feeling overwhelmed by debt There are some things to avoid doing:

Be sure to not neglect a secured obligation (like a car payment) in order to pay for an unsecure one (like a hospital bill or credit card). You could lose the collateral that secures that debt, which is in this instance your car.

Don’t borrow against the equity of your home. You’re putting your house in danger of going into foreclosure, and could be converting unsecured debt that could be discharged through bankruptcy, into secured loans that can’t.

Don’t take money from your account . This reduces the chance of having financial security in retirement.

Think twice about borrowing money from workplace retirement accounts and. If you lose your job, the loans can become inadvertent withdrawals and result in a tax bill that is not the best thing you’ll need.

Don’t base your decisions on which collectors are pressuring on you most. Instead, look into your options and select the one that is best for your situation.

Are you ready to get rid of your debt?

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

The author’s bio: Bev O’Shea was a credit reporter at NerdWallet. Her work has been featured in publications such as the New York Times, Washington Post, MarketWatch and elsewhere.

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