How Debt Relief Programs Work?

Key Takeaways
  • Debt relief can reduce costs while helping to eliminate high-interest debt.
  • Most programs include an element of debt forgiveness.
  • Creditors agree to change the loan terms when they fear you will not pay off the account in full.
  • Assistance can include waiving fees, lowering the interest rate, or reducing the principal amount owed.

Owing more than you can afford creates a sense of desperation that can lead to poor decision-making. You need relief from high-interest debt but don’t know where to turn. Which program will help you lower monthly costs, while allowing you to take responsibility for the bills you owe?

What is Debt Relief?

Debt relief includes five basic programs to assist with paying off unsecured debts and help you reduce monthly costs. Without help, it could take over 30 years to repay large amounts of high-interest obligations. Companies keep you trapped in the debt cycle by requiring minimum monthly payments that barely cover the interest charges, and then penalize you if you are one day late on a payment.

When balances become too high, even the minimum monthly payments can become a challenge. If you have too much debt in relation to your income, a debt relief program may help.

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Types of Debt Relief and How Each Works

Debt Consolidation Loans combine multiple debts into a single account. You save money by shortening the payoff to no more than seven years, and in many cases, lowering your overall interest. The monthly payment may increase, but you get a set interest rate and payoff date.

You may be a good candidate for debt consolidation if you have good to excellent credit and can afford the current or a slightly higher monthly payment.

Credit Counseling works with lenders to lower your interest rate and waive late fees. You save money on interest charges and can repay the debt faster because more of your payment goes toward debt reduction.

You may be a good candidate for a debt management program through credit counseling if you are not in default and are able to repay the debt within 60 months. Your payments could be the same or increase depending on the level of interest reduction you receive.

Chapter 7 Bankruptcy is the most zealous form of debt relief and can eliminate bills without any repayment. If you qualify, you could eliminate bills within six months, but you might have to sell any non-exempt property.

You may be a good candidate if most of your debt is unsecured, you earn below the median income in your state based on your household size, and you don’t have many assets.

Chapter 13 Bankruptcy requires you to repay creditors 100% of disposable income over a three- or five-year term. After fulfilling your repayment commitment, a judge could discharge the remaining balances on qualified debts.

You may be a good candidate if you owe large amounts to unsecured creditors and need legal protections to save property such as your home or a vehicle.

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Debt Settlement gives you more control than most debt relief options because you can choose which debts to enroll. You also have the power to negotiate a lower payoff.

To qualify, you must encounter a hardship preventing you from repaying the account in full. To demonstrate your misfortune, you must allow the bill to go into default. Once the account reaches the default stage, lenders are more open to negotiating new loan terms. It is also necessary to set aside money each month for repayment.

A debt settlement company can manage the process. Your financial counselor will recommend a monthly contribution level, communicate with creditors on your behalf, and negotiate a lower payoff when you have enough in savings. The new loan terms will aid in paying off your debt sooner by reducing the amount you owe.

You may be a good candidate if you currently have high levels of unsecured debts yet earn enough income to contribute funds toward eliminating those debts every month.

Final Thoughts

When you struggle to pay your current obligations, a debt relief program may help you get control of your finances while paying off high-interest debts.

  • What qualifies you for debt relief?

    The inability to stay current on existing accounts could qualify you for a debt relief program. However, you must have enough income to make some payments toward debt elimination every month.

  • Will debt relief help me pay off my accounts?

    Any debt relief program aims to help you eliminate high-interest unsecured debts like credit card payments. When you enroll in a program, you could qualify for forgiveness of a portion of your account balances.

  • What happens when I receive debt forgiveness?

    Paying less than the total balance has consequences. In most cases, it will hurt your credit score but could allow you to pay off debts faster, leading to an improved financial outlook.