- Professional agencies offer debt relief, which can forgive a portion of the amount owed through designated programs.
- The consequences of dropping out of a program include forfeiting concessions, dismissing your petition, losing protections, and potential legal action on the creditor's part.
- Failing to complete a debt relief program could leave your finances in worse shape.
Too much debt and the struggle to maintain payments can prompt you to seek help from an agency offering debt relief. You might hope to lower monthly payments and receive forgiveness for a portion of what you owe. When it is a challenge to keep up with current obligations, the last thing you want to do is make your financial situation worse.
Yet, enrolling in a debt relief program and then later dropping out could further complicate your finances. Before you decide a particular debt relief program suits you, verify what happens if you cannot complete the program.
Debt Relief Programs and How They Work
Debt relief programs offer a way to reduce the amount you owe, often while forgiving a portion of your debt. Each option works a little differently, but the concept behind every choice is to reduce costs allowing you to pay off debt sooner.
Consumer help tends to focus on unsecured accounts because it typically comes with above-average interest rates. High interest combined with large balances is a challenge to pay off because the bulk of your payment goes toward interest charges. Debt relief seeks to address these high costs through a variety of remedies.
What Happens When You Cannot Finish?
Debt consolidation is the only program that does not include a forgiveness element. You obtain relief by rolling multiple debts into a single loan. The new account comes with a fixed rate and set term. When you lower the interest rate, you can save even more.
There are two ways debt consolidation can make your financial circumstances worse.
The first is if you run up new debt on paid-off accounts. The other is if the monthly payments rise to a point you cannot maintain the cost. When either one of these things happens, it can exasperate an already challenging situation.
If you cannot meet the payoff on a consolidation loan, you might qualify for another form of debt relief.
Lose Concessions
Credit Counseling uses debt management programs to provide relief from high-interest debts. Once enrolled, a credit counselor recommends a repayment plan creditors must approve. As part of the plan, agencies request fee waivers and reduced interest rates that will allow you to meet the 60-month payoff requirement.
Dropping out of the program forfeits all creditor concessions. The plan pays a small amount toward all enrolled accounts each month. You typically do not pay off your obligations until the end of the program. Creditors add back waived fees and reduced interest charges based on the original plan agreement when you don’t finish.
You could wind up with late payments and closed accounts without relief from your debts.
Lose Legal Protections and Loan Forgiveness
Chapter 13 Bankruptcy repays creditors over a three- or five-year term. Leaving the program ruins your credit, forfeits bankruptcy protections, and you must repay creditors in full, including accrued interest and late fees.
It might be possible to convert the petition to a Chapter 7 if finances deteriorated substantially.
Chapter 7 Bankruptcy discharges debts within six months, lessening the chances of not completing the program. If you fail to get a discharge, you may face legal action from creditors, resulting in judgments and wage garnishments.
Creditors Can Sue
Debt Settlement requires missed payments and lump-sum amounts to pay off accounts. Once the account reaches charge-off, many lenders are open to negotiating new terms, which lowers the payoff. The tradeoff is the lender requires a lump sum or repayment within a few months. Debt relief comes from reducing the amount you must pay to eliminate the debt.
Dropping out of the program leaves you with defaulted accounts and no repayment agreement. Lenders may take you to court,further damaging your finances.
Final Thoughts
All debt relief options have negative consequences if you do not finish. However, debt settlement can lessen the impact because you become free from further payment requirements as you settle accounts. All other options take an all-or-nothing approach, which can further harm your finances if you cannot complete the program.
