The first question that might have come to your mind would what is exactly debt relief and why you need to know about it. Well, debt relief is a set variety of solutions that are designed to help you make your payments more affordable. This is done in order to get you out of the debt conundrum as soon as possible.
These kinds of solutions are often replaced with the loan which can lower the interest rate or it can modify the repayment term. Moreover, you might see that the total amount that you owe also got lowered.
If you decide on a debt solution that’s right for you, you’ll want to make sure you make any payments according to the terms of the new agreement of your debt relief plan. There are different types of debt relief solutions and a few of them are listed below for you.
Types of Debt Relief
Not one solution can save the problem of every other person. That is why debt relief has different types. People can choose the solution according to their needs and the kind of agreement they want to follow. Let’s take a closer look at some of the more common types of debt relief.
- Debt consolidation
- Credit counseling
- Debt management
- Debt settlement
- Debt forgiveness
Debt consolidation combines all the debt in a single account which makes it easier to handle them. In this way, if you are paying a different kind of debt to different places, you can simply add all of them and pay through one.
It ends the hassle of sending the debt to different sources. Moreover, you will only have to handle one single account which makes your work easy too.
To qualify for a debt consolidation loan, you must apply for new credit and meet the lender’s eligibility requirements, which may be difficult — but not impossible — if you have bad credit.
However, if your debt consists of a combination of credit card bills, then you can simply put all the debt in a single account. From here, you can start paying all the debts in a single transaction every time. Like any new credit account, this option is only available for those who qualify.
A credit counselor is a person who can help you in managing and arranging your budget, money, and debt. He gives you such a plan that you easily pay out your debt and spends money without any trouble.
Moreover, he works closely with you to understand everything about your money issues. Then he/she gives you a plan to solve them effectively.
This is one of the most effective solutions which any person in debt can use. In this solution, the debt relief company takes the credit from you and pays the creditors whom you owe. They do all this in such a way that they pay creditors according to the schedule. This plan is thus then known as a debt management plan.
In this method, the total amount stays the same, however, your credit counselor may talk to the other party and get you some lower interest rates.
Moreover, you might not have to apply for the new credit and you can keep the older package for paying up the debt. Lastly, you’ll want to review and confirm any changes they’re negotiating on your behalf directly with your creditors.
Debt settlement is a skill and technique that the companies negotiate on your behalf to get you a good amount of deal. In this deal actually, they even lower your debt value and makes it easy for you to pay. This might look like a great approach and option but it does not work in most cases.
The companies that offer this service sometimes advise clients to stop making debt payments and instead put the money into an account dedicated to paying off settlements.
If you follow this advice and stop making your payments, not only will your accounts continue to accrue interest and late fees, which will increase the account balance. The missed payments in particular can have a significant negative effect on your credit.
Debt forgiveness happens when the person who has to pay the debt is not able to pay any. The lender erases either part of or all of the debt. Both the debtor and lender can agree on a single value that would be much lower than the original value.
Things you need to know before you apply for debt relief
Well, almost everybody feels difficulty in paying the debt and they go for different solutions to answer it. When dealing with credit counselors and other such companies you need to be very careful about the following things.
Some options, such as credit counseling, debt settlement, and debt forgiveness, come with a high risk of scams. Remember if the counseling company is asking for an upfront payment, then avoid it.
It might be a scam because most such companies do not ask for payment before the work is done. Those are red flags that indicate a possible scam.
First, do your complete homework about all these companies. Then go through all those departments which can assure the credibility of that particular company. If you want to work with a credit counseling organization, check to see if it’s accredited by the National Foundation for Credit Counseling.
Always stay cautious and recheck the new interest rate if you are opting for the debt consolidation loan. The reason behind this is that you do not want to end up with a loan that has a higher interest than your current debt. That will only push you into another debt problem.
Watch out for loans that lower your monthly payments by extending the amount of time you have to repay the loan. Your monthly payments may be more affordable, but you’ll likely end up paying more in interest over the life of the loan.
Rates and terms vary from lender to lender, so be sure to compare loan offers from multiple lenders before making a decision.
Before you sign any debt relief solution always check their fees what they are offering and how you are going to pay those fees. Moreover, you should also check whether those fees are legit or not. Mostly they can manipulate you into something that you pay the wrong fees to them.
Credit counseling agencies offer many services for free, but if you enroll in a debt management plan, it may come with a set-up charge as well as a monthly fee. And some lenders may charge origination or other fees on debt consolidation loans.
Tax implications If you or a third-party negotiate with your creditors and agree to settle your debt for less than what you owe, the amount you save will likely be considered taxable income. You might have to pay taxes on it after your debts are settled. Make sure to budget for that as you consider your options.