What Are Your Debt Relief Options

Introduction

Each month, you continuously juggle, which bills to pay and which ones to push off until the next paycheck comes in because your monthly payment obligations are always more than your take-home pay. As the months’ pass, you watch your balances continue to grow, little by little, while you begin to wonder how long you can live like this before something gives.

Living paycheck to paycheck comes with constant stress and worry about how to pay all the bills, save for the future, and worrying about an unforeseen emergency that could stress your finances beyond your ability to recover. A seemingly simple financial challenge can become an overwhelming crisis when you barely earn enough to pay your current bills, let alone set aside money for emergencies or your future. When debt payments consume too much of your monthly income, you simply cannot get ahead.

If you find yourself in this situation, there are debt relief options available to provide both short and long-term financial help. Most importantly, you do not have to be behind on your bills to qualify for assistance in many cases. In fact, the sooner you reach out for help, the more options you will have to get the financial relief you need.

Key Takeaways
  • Debt relief options are available at all stages of your debt repayment journey. The sooner you enlist the help of a professional debt relief company, the more choices you will have.
  • All forms of debt relief will potentially have a negative impact on your credit score.
  • Focusing only on your credit score, will prevent you from lowering your debt or becoming debt free in the long term.
  • You can reach out to companies specializing in credit card debt relief even if you are current on your accounts but struggle to keep up with minimum payments.
  • Federal and state agencies regulate the debt collection and debt relief industry, providing consumers with protections against fraud, threats, and illegal debt collection practices.

Wondering Which Debt Relief Program is the Best?

 

Debt Relief Program Comparison Chart

Debt Consolidation Credit Counseling Debt Settlement Chapter 13 Chapter 7
Eligibility Good credit to qualify for a new loan Afford the monthly payments Have a financial hardship Do not qualify for Chapter 7 Meet federal income or means test
Type of Debt Relief Transfer balances to a new loan Financial education and accelerated debt repayment Negotiates with creditors to repay less than full balance Discharge of debts after 5 years of repayment Discharges of only qualified debts
Amount You Will Repay 100% of the new loan amount 100% of the debts owed plus lower interest rate Less than the total balance owed at enrollment Less than the total balance owed All qualified debts discharged
Relief Provided Lower interest rate on current debts Lower interest rate and waived fees Lower payoff amounts Lower payoff amounts Discharges all qualified debts
Time to Debt Elimination Loan term: up to 7 years 5 years 2-4 years 5 years 3 to 6 months
Can You Keep Enrolled Accounts Open? Yes No No No No
Can You Keep Your Property? Yes Yes Yes Yes, if payments current Limited property retention
Negative Impact on Credit Score? Sometimes Yes
Short-term
Yes
Short-term
Yes
7 Years on Credit Report
Yes
10 Years on Credit Report
Time on Your Credit File 7 years 7 years 7 years 7 years 10 years
Guaranteed Success No No No No No
Credit Score Required 600+ Minimum
720+ for Preferred Rates
No credit requirements No credit requirements No credit requirements No credit requirements
Best for What Debt Amounts $2,000+ Up to $20,000 with Supporting Income $20,000+ with Hardship and Some Income No more than $394,725 unsecured No limits
What Debts Included? Any debts Unsecured debts Unsecured debts Unsecured debts Unsecured debts
Private or Government Program Private Private Private Government Government
Number of Monthly Payments One One One One N/A

 

Debt Consolidation Loans Explained

Debt consolidation loans offer a great deal of flexibility and could be the best option if you have good to excellent credit, verifiable income to support the loan amount requested and you can meet other requirements mandated by the lender. By combining multiple debts into a new loan, you can consolidate payments and simplify your finances. A lower interest rate could save you money each month throughout the term of the loan repayment. Furthermore, if you are consolidating credit card debt with a new personal loan, interest accrual will now be calculated monthly, as opposed to a daily compound interest calculation that comes with credit card loans.

Both traditional banks and online lenders provide personal loans for consolidating debts. You do not need collateral or equity in your home, but you do need good credit and adequate income to qualify for a low-interest rate that will provide the payment relief you seek. Loan amounts range anywhere from $5,000 to $40,000. Your credit history, credit score and your income will all be taken into consideration when applying for this type of loan. Income in relation to your existing debts, also called the debt-to-income ratio, is another key factor a lender will take into consideration before approving your loan, and lenders will require verification of income before disbursing funds. Once approved, you can often receive the money needed to pay off higher interest debts using the new loan proceeds within a few days.

Debt consolidation loans could be the best choice if you have not missed any payments, have good credit, sufficient income and are not fully maxed out on your credit cards. Before accepting a loan, compare the loan costs, which typically include loan fees, the interest rate, the loan term, and monthly payment. Loans do not usually extend beyond seven years, which could raise your monthly payment, even though you will now enjoy a lower interest rate.

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Credit Counseling Explained

Non-profit credit counselors typically provide credit counseling and other services to help improve your financial and money management skills. Most credit counseling organizations offer a free credit and budget counseling session with a certified credit counselor and give you access to free educational materials on financial matters. You can also enroll in a course that could help you prevent foreclosure, complete required classes for bankruptcy or a homebuyer’s course that could qualify you for first-time homebuyer grants.

Credit counseling agencies also help with debt repayment through a Debt Management Program or DMP. After agreeing to a repayment plan, the credit counselor will notify creditors of your enrollment and set up an acceptable monthly payment plan that will result in repaying 100% of your credit card balances owed, plus interest at a reduced rate. You make one monthly payment to the credit counseling agency, and they will distribute payments to your creditors based on the terms of your debt management plan agreement.

In addition to your monthly DMP program payments, a credit counseling agency may charge a monthly fee to administer the program. Credit Counseling Agencies also receive fees from the credit card issuers for each Debt Management Plan they set up and administer. These fees are referred to as “Fair Share” contributions.

While you still must pay back all your purchase balances plus interest, you save money through lender concessions such as waived late fees, lower interest rates, and the elimination of other penalties or fees. If you do not finish paying off your debt through the DMP, lender concessions become void, reversing any savings you achieved at enrollment and adding these fees, and waived penalties back on your account plus interest. The program also requires you to repay all enrolled debt within 60 months or five years, which often results in a higher monthly payment than you may be making today.

A Debt Management Program offered through a credit counseling agency can help you pay off debt if you earn enough to repay creditors within five years. For this reason, most consumers with lower amounts of credit card debt under $25,000 are best suited to be able to qualify for the program and succeed in completing the full repayment of all balances plus interest charges over the 5-year term. You could also benefit from the credit counseling services’ free resources regardless of the final debt-relief path you choose.

Debt Settlement Explained

Debt settlement is a debt relief option that could allow you to settle high-interest unsecured debt, such as credit card debt, for less than the full balance owed. To qualify for debt settlement, you must be able to document a financial hardship that prevents you from repaying your creditors on time and in full.

When a job loss or other hardship such as divorce, loss of a spouse, or high medical bills, or a disability that prevents you from working causes you to fall behind on your payments, you can enroll in a debt settlement program to achieve both immediate and long-term financial relief.

The process starts with a free financial analysis where a debt consultant will evaluate your income, expenses, current debts, and your hardship. The consultant will then develop a monthly budget for you to live on and determine the available funds left over that you will use to fund a special purpose savings account that will be designated to settle your enrolled accounts. You then begin making monthly payments that are typically less than the combined minimum monthly payments you currently pay to creditors, instantly lowering monthly cash outlay while building up savings to pay off debt.

Your savings account is owned and managed by you and held by an independent third party for your protection. When your debt settlement company reaches an agreement with one of your creditors, you will be required to agree in writing to the terms of the settlement, and further authorize the distribution of funds from your savings account to be used to pay your creditor in accordance with the terms of the agreement. You will also authorize the distribution of any fees owed to your debt settlement company to be paid from the savings account.

A typical debt settlement agency will begin to settle debts in four to seven months after enrollment; once you have saved enough money in your savings account to give negotiators enough funds to effectively negotiate with. You must accumulate enough money to make either a lump-sum payment of the agreed-upon settlement or pay off the debt with a series of monthly installment payments which is usually required with large debt balances.

Credit card issuers and other lenders will only enter into a debt settlement agreement if you cannot maintain the minimum payments on your current debts due to your financial circumstances and demonstrated hardship. As creditors see the risk of default rise due to financial hardship, missed or late payments, or other factors such as rising credit utilization rates or a dropping credit score, lenders become more flexible and willing to accept offers to pay a portion of the outstanding balance as opposed to receiving little or nothing in a credit default or worse, a bankruptcy. It typically takes two to four years to eliminate all your credit card bills through a debt settlement program, even if you currently owe over $25,000 in high-interest debt.

A debt settlement program is best suited for consumers looking for short-term payment relief combined with a long-term debt elimination strategy. Many consumers choose debt settlement over bankruptcy to avoid the long-term damage to their credit report and preserve their ability to purchase a home or automobile which is difficult or impossible after filing for bankruptcy. Debt settlement is best suited for individuals or couples with over $25,000 in unsecured, high-interest debt such as credit cards, and who have experienced some type of financial hardship. You must earn enough to make consistent payments into your program savings account but not enough to pay the full amount owed on accounts each month.

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What Is a Chapter 13 Bankruptcy?

There are two types of bankruptcy relief consumers may seek depending on their situation.

Chapter 13 Bankruptcy is the personal version of the bankruptcy you typically see businesses navigate. Once you file, you receive immediate protection from the courts, stopping all calls from debt collectors and any foreclosure proceedings or wage garnishments. The bankruptcy process also gives you time to catch up on loans secured by the property you want to keep while making payments towards unsecured debt balances. In some cases, this might include restructuring the debt, extending payments, or adjusting the interest rate so you can keep your home or vehicle.

When you file Chapter 13 Bankruptcy, the courts place debts in one of three categories. The debt you must pay, bills you must bring current and pay in full if you want to keep the asset, and unsecured debts that receive partial payments based on your disposable income.

The second part of Chapter 13 involves creating a repayment schedule that diverts 100% of your disposable income to repay your unsecured debts for five years. Disposable income is the money left after subtracting allowable expenses from your gross income each month. During the five-year repayment period, a court-appointed trustee will oversee your finances and ensure that all disposable income available is redirected to your unsecured creditors to repay your debts. During this period, should your situation improve, or your income increase, any additional disposable income recognized will also be directed to your unsecured creditors and be used for debt repayment.

After completing two bankruptcy courses and five years of court-supervised repayments, a judge will discharge the remaining balances on your qualified debts. In addition to the cost of bankruptcy counseling courses and court costs, you will have to pay a bankruptcy attorney to prepare and file your case with the appropriate court.

The Chapter 13 process can protect assets such as your home or vehicle, giving you more time to bring the account current or restructure the loan so you can afford the payments. It is best suited for consumers who have a steady monthly income, allowing you to pay some, but not all your debts under court supervision.

What Is a Chapter 7 Bankruptcy?

The second type of bankruptcy available to consumers is a Chapter 7 Bankruptcy, also called liquidation bankruptcy. The process starts by filing a bankruptcy petition with a US bankruptcy court in the region in which you currently reside. In a Chapter 7 Bankruptcy, the process can move very quickly, usually within just a few months. Once your case comes before the court, a judge discharges all qualified debts without requiring repayment. Chapter 7 aims to give you a fresh start after a significant financial calamity or a series of financially devastating events.

It might sound amazing to be able to eliminate high-interest debts within a few months without paying creditors anything, especially if you are currently struggling to pay your bills. However, Chapter 7 Bankruptcy is a last resort option because of two important caveats: First, you must qualify, and second, you cannot keep many assets.

Qualifying for Chapter 7 requires you to earn less than your state’s median income or pass a means test that considers your income and expenses. Each state has a different cost of living index, but to give you an idea of the income levels you must fall below, Wisconsin’s median income is $59,209. It ranks 25th in a state-by-state comparison. States in the Northeast tend to be at the top, with Maryland’s median income of $81,868 and Massachusetts citizens earning a median income of $77,378. At the bottom of the list, the cheapest places to live include West Virginia, with a median income of $44,921, and Mississippi citizens earning a median of $43,567 annually. World Population Review compiled a list of median incomes by state which you can use to find the median income in your state.

The second challenge most people face when filing for Chapter 7 Bankruptcy is property ownership. You can only keep the property that is a qualified exemption. The federal bankruptcy court considers a vehicle worth no more than $4,000 (minus any outstanding loan) and equity in your home not to exceed $25,150 as an essential property worthy of an exemption. In some cases, your state may have more generous exemptions. The bankruptcy trustee will sell all non-exempt property to repay creditors before a judge discharges your remaining qualified debts.

These strict requirements disqualify many people either because they earn too much money or do not want to lose all their assets in bankruptcy.

Protections Available to All Consumers Seeking Debt Relief

Federal and state statutes strictly regulate the debt-relief industry protecting consumers from unscrupulous debt collection practices and companies seeking to take advantage of people in a vulnerable financial situation. Companies offering debt relief services are subject to state and federal regulatory oversight, licensing, and bonding in most states.

The Federal Trade Commission (FTC), Government Accountability Office (GAO), and Consumer Financial Protection Bureau (CFPB) all have regulatory or oversight authority of the industry at the federal level and states’ Attorneys General regulate companies at the state level.

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