What is Debt Relief and is it Worth the Consequences?
Updated: Nov 9, 2020
The Ultimate Guide to Debt Relief Options
To provide a very broad-based definition, debt relief is the process by which you reduce or refinance your debt in order to reduce the principal amount owed on your debt and lower you monthly payment amount. Debt relief can mean a lot of different things for a lot of different people. Debt management programs, debt consolidation loans, debt relief programs and credit card consolidations, bankruptcies and credit counseling are all technically considered to be debt relief options. If you are carrying a significant amount of credit card debt and are worried about your current financial situation, then debt relief can most definitely be a useful tool to help provide immediate payment relief. Depending on the option you chose to go with, the debt relief process itself may not be so simple, that’s why it’s vital you do your research. Even though debt relief options may not be the best solution for everyone, if done correctly, they can be a tremendous tool to get you out of a financial bind and help regain your financial footing. The process isn’t magic by any means, it just requires a little bit of elbow grease and some financial know-how in order to receive the most savings possible.
There are many financial options available to help you get out of debt, so before we decide which is the best or worst let's first discuss the various types of debt relief options out there and provide a brief summary of each.
Debt Relief Options:
Debt Management Program – A program in which a credit counseling or debt management agency attempts to negotiate better interest rates with your creditors. This option does not typically provide significant monthly savings since you must pay the agency to negotiate lower rates each month. The FTC provides an extensive guide on how to choose the best credit counseling companies.
Bankruptcy – Total or partial debt forgiveness as determined by US bankruptcy laws. This option has serious long term affects to your credit worthiness and is public knowledge. So before considering bankruptcy, make certain it is truly your last resort. For additional guidance and assistance, refer to the following guide from the Department of Justice before you file for personal bankruptcy.
Debt Consolidation Loan – A loan to combine your smaller loans and credit cards into one lower interest loan and monthly payment. This option is usually very difficult to qualify for but can help you save money on interest payments and make your payments more manageable. The terms and parameters of debt consolidation loan you qualify for will be the most significant factor in determining if this option will actually help your situation.
Debt Relief Program – A debt relief program where an agency negotiates with your creditors in order to allow you to pay back less than you owe. This option will help you save a lot of money but requires you to close out your credit cards and may negatively impact your credit in the short to intermediate term. In terms of debt relief options, this option is considered by many to be a "goldilocks" option in that it is not "too hot" or "too cold". Since debt relief programs save you a substantial amount of money and don't have too many associated negatives this is often times considered to be the most balanced option.
Credit Card Consolidation Program
First, we will discuss debt settlement (commonly referred to as a debt relief program or credit card consolidation program), since it is usually the option that will provide the most benefits while having the least side effects and is currently the most popular of the above options. Simply put, a credit card consolidation program will allow you pay off all of your unsecured debt for less than you currently owe. This option is provided by debt relief companies that negotiate with creditors on your behalf to stop accrual of high interest and get you a principal reduction on your credit card or personal loan debt. This option will likely impact your credit worthiness but it also provides a great deal of payment relief and will allow you to save a substantial amount of money each month. So, it is really up to you to weigh the opportunity cost of doing one of these options. Would you rather save $500 a month or retain a slightly higher credit score and have more credit availability in the short term? If you have no plans to use your credit in the short term you should definitely consider this option to be the most viable solution available to you. In recent years, the popularity of the debt management and bankruptcy options has greatly declined – so many US consumers have in fact decided to go with credit card consolidation programs.
Consequences of Debt Relief
There are many shady actors in the debt relief industry whose main aim is to take advantage of struggling consumers. Your first priority should always be to check whether the debt relief company in question charges up-front fees. No reputable debt relief company will ever charge you anything up-front, until they have successfully resolved a debt on your behalf and have saved you money. Also, if you decide to go with a debt relief program, do not abandon the program half way through! Many people that choose a debt relief program end up abandoning it midway through, which ultimately ends up making their situation worse. So, if you do move forward with this option make sure you stick with it. Although debt relief programs have also provided people with a great deal of breathing room and can be very beneficial, there are few things to consider before choosing this option.
You should consider the following before choosing a debt relief program:
What do you need to qualify?
What will be the cost and fees charged for the program?
How successful has the company been in the past?
Are you at risk of getting sued on your debts?
Will you be able to keep up with your payments and finish the program?
Debt Consolidation Loan:
If you qualify for a debt consolidation loan this may be a suitable way to save money on interest. Debt consolidation loans are typically one of the fastest ways to restructure your debt. With a debt consolidation, you can combine your credit card debts into one loan and have one monthly payment. If you have good credit it is also safe to assume that you will have a lower interest rate than you currently do on your credit cards. This can help you save money on interest as you are paying down your debt and it can provide more convenience since you will only be making one payment each month. Debt consolidation loans can be extremely beneficial for some consumers, however, it is typically very hard to qualify for a good debt consolidation loan. Ironically enough, individuals that typically do not need a debt consolidation loan are the ones that qualify for this option.
Consequences of a Consolidation Loan:
Debt consolidation is typically like robbing Peter to pay Paul. You are borrowing money (hopefully at a lower APR) in order to pay off what you already borrowed. In theory, it’s a great idea but this option can sometimes lead you to become worse off than you were previously, especially if unexpected expenses were to arise. If you are planning on consolidating your debt, you have to be aware that sometimes there are large associated costs with doing so. Many lenders will charge a substantial origination fee and interest rates that may not be much better than what you currently have. If this is the case, then you should avoid the debt consolidation loan altogether and look for other avenues to pay off your debt. Also, does the debt consolidation loan cover the entirety of the balance you need to pay back? If it doesn't, then this option will just make your situation worse and add another loan payment you will end up having to juggle each month.
Other Debt Relief Options:
Whichever option you think is best for you, you really need to do your homework, even more so for bankruptcy and debt management options. If you can repay your debts back with little effort, then you should buckle down and attempt to budget your way out of debt. As bankruptcy and many of these options are typically for people that are struggling to make progress on their debt obligations, they should only be utilized be individuals that are not making progress!
You should consider claiming bankruptcy when:
You are having trouble paying your mortgage on time.
Your income is less than your monthly expenses.
You are borrowing more than you spend at the end of each month.
You have attempted to resolve your debt with some of the above options.
If you are considering tackling debt repayment on your own, you want to make sure you are able to repay all your debts back within a set timeframe and try to set up a five-year plan. If you do not feel that you will be able to make a reasonable amount of progress on your debt obligations within a few years than you should begin considering debt relief options as a viable solution.
Stop Adding to Your Debt:
Regardless of the debt relief option you are considering, it is always advised to stop adding to your debt and stop utilizing revolving lines of credit. Unless you are a financial guru, it will be near impossible to determine your progress on paying off your debt if you are still charging things to your credit cards. The most common mistake people make after getting a debt consolidation loan is that they still continue to use their credit cards and continue adding to their debt. If you are trying to become debt free, then stopping your credit card usage should be your primary focus. If you keep on making additional charges, it will only set you back further and erase all the progress you’ve made. Your best bet in this case is to cover all of your expenses with your income and avoid credit cards altogether. Otherwise, how will you expect to make any progress if you continue to make charges on your credit cards?
Ask for Help:
More often than not, people attempt to deal with this kind of problem on their own. As embarrassing as it might seem, if you are struggling to get a hold of burdensome credit card debt then you really should reach out to your family and friends and see if they can provide any advice or insight. Although talking about finances is usually frowned upon, understand that it could always be worse and sometimes desperate times call for desperate measures. As long as you are coming from a place of sincerity, there is really nothing to be ashamed about when seeking help from others. It’s always recommended that you reach out to a trusted family member or friend, at the least they can lend an ear to your current financial situation and give you a second opinion. Besides, what's the worst that could happen?
"Be strong enough to stand alone, smart enough to know when you need help, and brave enough to ask for it." Ziad K. Abdelnour