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Debt Relief: Know Your Options and the Consequences
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Debt Relief: Know Your Options and the Consequences
Debt relief may 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 holds a bachelor’s education in journalism at Auburn University and a master’s in education from Georgia State University. Before joining NerdWallet, she worked for the daily papers, 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.
7 January 2023
Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years at The Oregonian in Portland in roles including copy desk chief and team leader for design and editing. Prior experience includes the editing of copy and news for several Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in mass communication and journalism from Iowa’s University of Iowa.
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Find that you’re just not seeing progress in your debt, no matter what you do? If that’s the case you could be dealing with massive debt.
To break free of this financial burden, look into your debt relief options. These tools may alter the conditions or amount to help you be back on track faster.
But debt-relief programs are not the right solution for everyone. Moreover, it is important to know what the implications could be.
Debt relief could involve wiping off the debt through bankruptcy, obtaining changes on your interest rates or payment schedule to lower your payments; or persuading creditors to agree to pay less than the total amount due.
When should you seek debt relief
Consider the possibility of bankruptcy, debt management, or debt settlement when either of these is true:
There is no way of paying off unsecured debt (credit cards, medical bills, personal loans) in the next five years, even if make drastic efforts to reduce expenditure.
The sum of your unpaid unsecured debt must be at least half of your income.
However If you are able to pay off your debt within five years consider a do-it-yourself plan. It could comprise a combination of debt consolidation, appeals to creditors and more strict budgeting.
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Beware of scams and debt relief downside
The debt relief industry includes scammers who are eager to take what little money you have. A lot of people who enroll in programs for debt relief fail to finish the program. It is possible to end up with debts that are larger than the ones you had when you first started.
But debt relief may give you the new start or the breathing space you’ll need to achieve real progress.
Make sure you are aware of — and verify — these points prior to signing any contract:
What do you need to know to qualify.
What fees will you have to have to pay.
Which creditors are being paid, and how much; If your debt is in collections, ensure you understand who owns the debt, so that payments are made to the right agency.
The tax consequences.
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Relief from debt through bankruptcy
There’s little point in entering a debt settlement or debt management strategy if you’re not going to be able to pay as you’ve agreed to. It is recommended to speak with an advisor before you embark on any strategy to reduce debt. Consultations are generally cost-free, and if you’re not eligible then you are able to move on to other options.
The most commonly used form of this is Chapter 7 liquidation, can erase the majority of credit card debt, unsecured personal loans and medical debt. The process can be completed within three or four months if you qualify. The things you need to know:
It won’t erase or obligation to support children as well as students loan debt is highly unlikely to be forgiven.
It could be detrimental to your credit and will remain on your credit report for up to 10 years even as you attempt to repair your credit history. If your credit score is already poor, a bankruptcy may help you rebuild your credit faster instead of trying to pay back. (Learn more about bankruptcy .)
If you’ve made use of an unsecured loan, filing bankruptcy makes the co-signer 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 best choice in the event that you must surrender property you wish to keep. The rules differ by state. Typically, certain kinds of properties are exempt from bankruptcy, like vehicles with a specified value and part of the equity of your home.
It may not be necessary in the event that 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 be able to sue you and receive a judgement, but they won’t be in a position to take the money.
In addition, not all people with a large amount of debt can qualify for. If your earnings are above the median of your state and the size of your family or you own a home you want to save from foreclosure, you may need to apply for Chapter 13 bankruptcy.
is a three or five-year repayment plan that is approved by the court, based on your income and debts. If you’re able to stay on the plan for its full term, the remaining unsecured debt is discharged. It’ll take longer than a Chapter 7 — however, if you’re in a position to make the payments (a most people don’t), you will get to keep the property. The Chapter 13 Chapter 13 bankruptcy stays on your credit report for seven years from the filing date.
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Assistance through debt management plans
A lets you pay your unsecured debts — typically credit cards -completely, however often at a reduced interest rate or with fees waived. It is a one-time payment every month to a credit counseling company and it distributes it to your creditors. Credit counselors and credit card firms have agreements that are long-standing that aid debt management clients.
Credit card accounts will be shut and, most of the time you’ll need to be with no credit card until you’ve finished the plan. (Many people don’t complete the plan.)
Debt management plans themselves do not affect your credit scores But closing accounts may harm your score. Once you’ve completed the plan you are able to apply for credit once more.
If you don’t pay on time, you could be kicked out of the program, however. It is important to choose an agency accredited by the the . However, you must ensure that you are aware of the costs and what alternatives you may have for dealing with financial debt.
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Relief through debt settlement
is a last resort for people who are in a state of overwhelming debt, but don’t qualify for bankruptcy or want to file bankruptcy.
Companies that offer debt settlement typically ask you to stop making payments to your creditors and deposit the funds into an escrow account. Each creditor is approached as the money builds up in your account and you get further behind in payments. A fear of not getting anything whatsoever could prompt the creditor to take a smaller lump-sum offer and then agree to not seek to pursue you for the rest.
In the event that you don’t pay your bills, it could cause collections calls, penalty charges and, possibly, legal actions against you. Debt settlement stops none of that , even though you’re negotiating. It could take months for the settlement offers to begin. Based on the amount you owe, the process could take years , and the continual instalments further erode the credit rating.
You could also be faced with tax bills on forgiven amounts (which the IRS considers income). Lawsuits can lead to tax liens on property and wage garnishments.
You can try , or you can hire a professional. The industry of debt settlement 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.
Certain of these companies declare themselves to be . They’re not. It is something that you can handle by yourself, and it will not harm your credit score.
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Do-it-yourself debt relief
There’s nothing to suggest that you shouldn’t be able to borrow from any of the options for debt relief and then create your own debt relief plan.
You can do what credit counselors do in debt management strategies: Contact your creditors, explain why you’re behind, and then what concessions you need to catch up. Most credit card companies have special programs for those in need and may be willing to reduce your interest rate or waive charges.
It is also possible to educate yourself on debt settlement and then negotiate an agreement with creditors by calling them yourself. (Learn how to do this .)
If your debt isn’t too overwhelming alternatives to paying off debt might be available. For example, if your credit score is good, you may be able to apply for an account that offers a zero-interest balance transfer rate that could allow you to breathe. Also, you could find a card one with a lower rate of interest.
Those options won’t hurt your credit score so long as you pay the required payments, your credit score should improve.
If you decide to go down this route However, it’s essential to have a plan that will prevent you from getting into a cycle of debt. It’s also difficult to qualify for new credit cards or a loan in the event that you’re heavily in debt. That frequently leads to late payment or high balances and they can harm your credit score.
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What not to do
Sometimes overwhelming debt comes in a frenzied speed like a health crisis, unemployment or natural disaster. Perhaps it happened in small increments but now collection agencies and creditors insist on paying but you can’t.
If you’re struggling with debt, here are some things not to do:
Do not ignore a secured loan (like a car payment) in order to settle an unsecure one (like a hospital bill or credit card). It is possible to lose the collateral used to secure that debt, which is in this instance your car.
Don’t borrow against the equity of your home. You’re putting your house at risk of foreclosure and you could be turning unsecure debt that can be eliminated in bankruptcy into secured debt which isn’t.
Do not take money out of your . This reduces your chances of a financially secure retirement.
Consider avoiding borrowing money from retirement accounts at work and. If you lose your job, the loans could be withdrawn in error and lead to a tax bill that is not the best thing you’ll need.
Do not make your decisions based on the collectors who are threatening on you most. Instead, you should research your options and choose the one that is best for your situation.
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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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