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Debt Relief: Understand Your Options and the Consequences
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Debt Relief: Understand Your Options and Consequences
Debt relief can ease the burden of a massive debt however it’s not suitable for everyone. Here are options to explore.
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 diploma in journalistic studies from Auburn University and a master’s in education from Georgia State University. Before coming to NerdWallet she was employed by newspaper publishers, including daily ones, MSN Money and Credit.com. Her work has appeared on 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 at The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Previous experience included writing copy as well as news editing for many Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s 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 how hard you try? If this is the case then you may be in the middle of massive debt.
To break free of debt, you should look into your debt relief options. These tools can change the conditions or amount to help you get back on your feet faster.
However, debt relief programs aren’t the right solution for everyone, and it is important to know what the implications could be.
Debt relief may involve wiping the debt out altogether in bankruptcy; getting changes on your interest rates and payment schedule to make your payments lower; or persuading creditors to agree to accept less than the entire amount owed.
When you should seek debt relief
Take into consideration bankruptcy, debt management or debt settlement if one of these is true:
There is no way of repaying unsecured debt (credit cards medical bills or personal loans) in the next five years, regardless of whether you take extreme measures to cut spending.
The amount of your unpaid debt is equal to half or more of your total income.
On the other hand, if you could potentially pay off your debt within five years, consider a self-help strategy. That could include a combination of debt consolidation as well as appeals to creditors. more disciplined budgeting.
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Be aware of scams, negative effects of debt relief
The industry of debt relief is full of scammers that are eager to grab whatever little cash you have. Many who sign up for programs for debt relief do not complete them. You could end up with debts that are larger than the ones you had when you first started.
However, debt relief could give you a fresh start, or the reassurance you need to finally achieve real progress.
Be sure you understand -and confirm these points prior to signing any agreement:
What do you need to know to qualify.
What fees you will pay.
What creditors are getting paid and at what amount; If your debt is placed in collections, ensure you know who owns the debt, so that payments are made to the correct agency.
The tax consequences.
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Debt relief through bankruptcy
It’s not worth entering a debt settlement or debt management strategy in the event that you won’t be able to make the payments as the terms agreed upon. We recommend talking with an advisor before you embark on any strategy to reduce debt. Initial consultations are usually cost-free, and if you aren’t eligible then you are able to move on to alternative options.
The most popular type of , Chapter 7 liquidation, can eliminate the majority of credit card debt, unsecure personal loans and medical debt. It is possible to complete the process in three or four years if you qualify. What you should know:
It won’t erase or child support obligations, and the student loan debt is highly likely to be forgiven.
It could be detrimental to your credit and will remain the credit score for as long as 10 years even as you work to restore your credit history. However, when your credit is already in bad shape, a bankruptcy may enable you to repair your credit sooner instead of trying to repay. (Learn more about when .)
If you’ve made use of the services of a bankruptcy attorney , your bankruptcy filing will render the cosigner responsible for the amount owed.
If the debts keep piling up, you aren’t able to file another for eight years.
It might not be the best option if you would have to give up property you want to keep. The rules differ by state. In general, certain types of property are exempt from bankruptcy, such as vehicles with a specified value and part of the equity in your home.
It may not be necessary when you’re “judgment evidence,” which means you do not have any income or property that creditors can pursue. Creditors can still 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 earnings are above the median of your state and your family size or you own a home you want to save from foreclosure and you are in need of a loan, you might have to file in Chapter 13 bankruptcy.
is a three or five-year repayment plan that is approved by the court that is based on your income and debts. If you’re able to stick with the plan over its entire duration, the rest of your unsecured debt will be discharged. This process will be more time-consuming than the Chapter 7 bankruptcy, however, if you’re able to keep up with the payments (a most people don’t) then you’ll be able to keep your home. A Chapter 13 bankruptcy stays on your credit report for seven years after the filing date.
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Assistance through debt management programs
A permits you to pay your unsecured debts -usually credit cards- in full, but often at a reduced interest rate or with fees reduced. You make a single payment each per month, to the credit counseling organization that distributes the money among your creditors. Credit card and credit counselor companies have long-running agreements in place to help people with debt.
Your credit card accounts will be shut and, most of the time you’ll need to be without credit cards until you’ve finished the plan. (Many people don’t complete the plan.)
The plans for managing debt do not impact your credit scores However, closing your accounts could hurt your scores. Once you’ve completed your plan, you can make a new application for credit.
If you don’t pay on time, you could be kicked out of the program, though. It is important to choose an agency that is accredited by the the . But, make sure you are aware of the costs and other options you could have for dealing with financial debt.
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Relief through debt settlement
is the last option for those with a lot of debt, but aren’t eligible for bankruptcy, or don’t want to file bankruptcy.
The companies that negotiate debt typically request you to stop paying your creditors and instead place the money into an Escrow account. Each creditor is approached in the same way as the money builds up in your account, and you become further behind on your payments. The fear of receiving nothing whatsoever could prompt the creditor to take the offer of a lesser lump sum and not take the remainder.
In the event that you don’t pay your bills, it could cause collections calls, penalties and, possibly, legal actions against you. The debt settlement process stops all of this while you’re negotiating. It could take several months for the settlement offers to begin. In the case of how much your debt is, this process could take years and the continued late payments further damage the credit rating.
There is also the possibility of tax charges on forgiven amounts (which the IRS counts as income). The law suits can lead to wage garnishments and property liens.
You can try , or you can hire a professional. The debt settlement business is rife with scammers However, 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 words.
Some of them also advertise themselves as . They are not. Debt consolidation is something you can handle 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 take advantage of any of the debt relief options and create your own plan.
You can do what credit counselors use in their debt management plans: Contact your creditors, explain to them why you’re behind, and then what concessions you need to catch up. Most credit card companies have programs for hardship and may be willing to cut the interest rate and eliminate charges.
You could also learn on debt settlement and then negotiate an agreement by contacting creditors yourself. (Learn how to .)
If the debt you have isn’t insurmountable, more traditional debt-payoff strategies could be possible. For example, if your credit score remains good, you may be able to get credit cards with a 0% balance transfer offer that can allow you to breathe. You could also find a credit card with a lower interest rate.
These options shouldn’t harm your credit; provided you keep making the payments your credit score will improve.
If you choose to do this However, it’s essential to have a plan that will prevent you from having to pay back your debts. It’s also difficult to get an additional credit card or loan when you’re deeply in debt. That is often the reason for missed payments or high balances and they can harm your credit standing.
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What is not to do
Sometimes, overwhelming debt can come with devastating swiftness — a health crisis, unemployment or natural disaster. Or maybe it came in small increments that the collection agencies and creditors are pressing you to pay, and you just can’t.
If you’re feeling overwhelmed by debt, here are some things to avoid:
Don’t neglect a secured debt (like car payments) in order to pay for an unsecure one (like a hospital bill or credit card). The collateral used to secure that debt, which is in this instance your vehicle.
Do not borrow against the equity of your home. You’re putting your home at risk of foreclosure and you could be turning unsecured debt that could be discharged through bankruptcy, into secured loans that can’t.
Do not take money out of your . This reduces the chance of having a financially secure retirement.
Be wary of borrowing funds from retirement accounts at work and. If you are fired, the loans could result in accidental withdrawals and trigger taxes, which is the last thing you’ll need.
Don’t base your decisions on which collectors are pressuring you the most. Instead, take time to look into your options and select the most appropriate one to suit your needs.
Are you ready to take on your debt?
Track your balances and spending in one place to see the way to get out of the debt.
Author bio Bev O’Shea is a former credit writer at NerdWallet. Her work has been featured in publications such as the New York Times, Washington Post, MarketWatch and elsewhere.
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