How Does Debt Relief Work?
Debt relief can be a beacon of hope for those who are underwater in debt. It can help you significantly reduce or even eliminate your debt, making it easier to manage your finances. If you’re part of the 35% of Americans in the most debt of their lives, you might want to consider debt relief. But what is debt relief, and how does debt relief work?
In this article, we’ll be going over everything you need to know about debt relief and how you can use it as a tool to build a brighter future. Let’s get you back on track to achieve financial freedom!
What is Debt Relief and Why is it Important?
Debt relief is a financial program that allows people to reduce or eliminate their debt. The main goal of debt relief is to provide people with financial relief and a better way to manage their debt. Doing so alleviates the burden and stress of having large amounts of debt, which ultimately helps people regain control of their finances.
Debt relief is important because it offers a lifeline to individuals who are facing overwhelming debt that may feel impossible to overcome. Not only does debt relief help struggling individuals, but it also contributes to maintaining economic stability. When individuals within a population are in a better financial situation, it means they have more disposable income to stimulate the economy, and it reduces the risk of an economic downturn.
Types of Debt Relief
There are a few different types of debt relief programs and strategies available. Below, we go over the types of debt relief programs so you can determine which one is the right fit for you.
Debt Consolidation
Debt consolidation is a debt relief strategy combining multiple debts into one loan. Typically, this method can give you a lower interest rate with a single monthly payment. Managing multiple debts and payment due dates can get confusing, so debt consolidation aims to streamline your debt payments and simplify the process.
Debt Management Plans
A debt management plan is a debt relief program that’s facilitated through a credit counseling agency to help people pay off multiple debts. Agencies make paying off debt more manageable by negotiating with your creditors on your behalf for more favorable loan terms. These terms can include lower monthly payments, lower interest, and even waiving fees. On top of that, the agency collects one single payment per month and then distributes the payment amongst different creditors on your behalf.
Debt Settlement
Debt settlement is a debt relief program that allows you to negotiate a reduced lump-sum payment amount with the help of a debt settlement company. Generally, the reduced lump-sum amount is a fraction of the original debt. Although debt settlement can help significantly reduce your total debt amount, it can have a negative impact on your credit score.
Bankruptcy
Bankruptcy is a debt relief strategy that involves a legal process of discharging or restructuring your debt. When going through bankruptcy, the court oversees how your debts will be resolved depending on the type of bankruptcy you declare. It’s not recommended to declare bankruptcy unless you have no other options to alleviate your debt since it can negatively affect your credit and financial standing.
Choosing the Right Option for Your Needs
There’s no one-size-fits-all solution when it comes to debt relief. When choosing the right debt relief option for you, there are several factors to consider depending on your specific situation. The factors you should consider include:
How Much Debt You Have
The amount of debt you have can affect the debt relief options available to you since some programs have minimum debt requirements.
What Your Income Is
Your income can affect your eligibility for debt relief programs and your ability to make payments.
What Your Credit Score Is
Your credit score can affect whether you qualify for debt consolidation and your interest rate for the consolidated loan.
Future Financial Goals
Depending on whether you have any financial goals, such as buying a home, you should consider debt relief options that won’t negatively affect your credit score.
How to Avoid Debt Relief Scams
If there’s a debt relief company that’s offering you something that’s too good to be true, it probably is. There are many debt relief programs and companies out there, but unfortunately, not all of them are legitimate. It’s important to be wary of potential debt relief scams while reviewing your options.
Here are some tips for you to recognize a potential debt relief scam:
Look for Accreditation
Find an accredited debt relief company that’s been certified by a third-party accreditation organization, such as the American Association for Debt Resolution (AADR), the National Foundation for Credit Counseling (NFCC), and the Financial Counseling Association of America (FCAA).
Be Suspicious
If a debt relief company says they can reduce your debt by more than 50%, this should raise suspicion.
Get It in Writing
Make sure you have everything in writing before signing any contract. This should include the terms and conditions, repayment schedule, interest rates, and fees.
Don’t Pay Upfront
Don’t pay any upfront fees. Legitimate debt relief companies will only charge you a fee after they’ve successfully relieved you from any debt.
Final Thoughts
If you’ve been overwhelmed with debt, understanding how debt relief works is the first step to regaining financial stability. Debt relief is an incredibly valuable tool for individuals who feel like their debt is taking over their lives. There’s a variety of different debt relief options that you can consider depending on your personal circumstances.
Remember to do your research and choose wisely when it comes to a debt relief program or company. If you’re still unsure of which option may be right for you, don’t be afraid to consult a financial advisor. Put your debt relief plan into action and start working towards your debt-free life today.
Looking for more information? Check out our article on tax debt relief.