Got debt? You are not alone. Statistics tell us that 40% of people living in American currently spend more money than they earn, putting them in a likely position to accumulate debt.
If you are not paying close attention to your finances and spending habits, you might be surprised to find out how easily debt can accrue and how quickly it can become a headache to pay back.
How do you know when you are in debt
Debt begins when you struggle to pay your bills, can’t meet minimum payments, and fall behind on your payment schedule.
You might find yourself scrambling to take out more credit or loans to pay bills, only leaving yourself with high interest fees and even more debt to pay off in the future.
You might also notice the impacts outside of your bank account and bill balances; debt can impact your personal health and relationships.
You might have difficulty sleeping, focusing, and might experience high levels of stress if you are worried about your financial situation. Debt can also strain relationships between families and partners.
Debt can also become a tricky cycle to climb out of. This can put people in a vulnerable position to be taken advantage of by lenders who offer what appears to be an attractive loan, but is tied to a sky high interest fee and additional finance fees.
Especially since increased debt lowers your credit score, trying to find solutions to paying back debt can become an overwhelming task.
I don’t like to paint this daunting picture of a person being in debt, but what I am trying to emphasize is the seriousness of this matter while providing this comfort: debt can be managed.
No matter your current financial situation, if you are feeling the pinch of debt and dodging different collector calls, know that with careful planning and patience you can overcome your present financial situation.
How? Well, today I am going to discuss the concept of debt relief, what it is, and who might be eligible for this avenue when trying to overcome debt.
The solution to debt will look different for each individual, and you might be curious if debt relief for you.
What Is Debt Relief
In the simplest of terms, debt relief is the forgiveness of some or all of a person’s present debt, but the details surrounding debt relief ranges depending on the path you take and what options are available to you.
In some cases, debt relief can slow down or stop the increase of your debt while you work to pay off the principal amount. In other situations, debt can be reorganized to get you lower interest fees or a longer payment term.
When looking at the definition of debt relief, you will understand why it can in fact be “relieving” for the individual: negotiating new terms surrounding your current payments or reducing the amount of debt you need to pay back can make coping with debt a lot more manageable for some people.
When To Consider Debt Relief
Debt relief might be an option for you if you are in the following situations:
- 1The total amount of unsecured debt you owe is equal to half or more of your gross income
- 2Even upon budgeting your finances and making changes to your spending habits, you still are not able to pay back your unsecured debt in 5 years or less
- 3You have exhausted all self- help strategies like managing your own money on a budget or contacting your creditors
Before you enter any agreements or take any action with debt relief, it is strongly recommended that you consult with a reliable credit counselling organization to decide on the best plan of action for your individual situation.
How Debt Relief Works
Debt relief can come as one of three options: debt management, debt settlement, and bankruptcy.
Debt relief companies like Freedom Debt Relief or National Debt Relief will assess your individual financial situation and offer you solutions that you will have to decide to be beneficial to you or not.
Read more to understand different channels of debt relief.
#1. Debt Management
Debt management is a plan that consolidates an individual’s unsecured debt (loans that are not protected by collateral, like a credit card, student loan, or most personal loans).
This amount is then paid off in monthly increments that the individual can afford based on their personal budget.
You make this payment to a credit counselling agency that will pay your amounts owed on your behalf.
In this situation, interest rates may be reduced.
During the process of debt management, you will not have access to your credit card accounts, and will have to wait until your debts are paid off to have access to a credit card again.
On the bright side, this can be an opportunity to learn how to budget without relying on credit to meet your daily expenses.
A debt management plan can be an option to consider for people who can afford their primary payments like their mortgage and living costs, but are over their heads with credit card or personal loans.
#2. Debt Settlement
A debt settlement is an agreement that is negotiated for you by a debt settlement company, with the intention to reduce the amount of debt you owe.
This still comes at a cost to the individual: a negotiator will offer your creditors a lump sum of money that you will pay to them in order for them to eliminate your debt (this amount will be less than the debt you owe).
If the creditor agrees, you pay the determined amount and the remainder of the debt is forgiven.
On the other hand, not all creditors will negotiate with your debt settlement company, and not all creditors will agree to the negotiator’s offer.
In the event of this happening, you may even still need to pay the debt settlement company a fee for their services, leaving you back at square one.
The process of undergoing debt settlement can also be a lengthy one, and it could even take years to successfully reach an agreement with a creditor.
During that time, you put yourself at risk of further attention by collectors and even potential legal action. As well, more waiting time means that you are missing more bills, damaging your credit score further.
This is why, while it sounds like an attractive option, debt settlement is not ideal for the majority of people. In fact, because of its high risk nature, debt settlement should only be considered if a person does not qualify for bankruptcy.
Finally, debt relief can also come in the form of bankruptcy, which is different from the above services mentioned as it is a legal process.
As with any action taken to manage debt, you want to have access to professional and knowledgeable advice to make an informed decision to suit your individual situation.
Therefore, before you consult any debt relief options, I suggest you converse with a bankruptcy attorney first to see if you qualify.
Bankruptcy is typically the final route that people take, once they are sure that all other options to relieve debt have been consulted and they are experiencing a large amount of debt that they are sure they cannot pay back in any form.
In bankruptcy, you agree to surrender your non-exempt assets in exchange for debt forgiveness.
Bankruptcy, like all debt relief options, does not come without its conditions. When you declare bankruptcy, you still have obligations like child support payments and in some cases, student loan debt.
Your credit score will drop significantly, making it may become a barrier when you are applying for jobs, credit cards, or rental agreements that require a check of your credit history.
Bankruptcy also puts you at risk of losing personal assets that are exempt, like a second vehicle, financial assets, business property, or vacation property.
Keep in Mind: Debt Relief Does Not Always Help
It is important to realize that in both debt management and debt settlement, these third parties companies are for-profit ventures that might now always be in your best interest.
As well, be mindful with who you agree to do business with, as scammers can also pose as reliable debt relief companies.
Red flags that can indicate an unreliable debt relief company include:
- 1High fees, especially if you ask you to pay upfront, in advance, or sign on to a monthly fee program
- 2Delayed payments: make sure you can also get receipts to prove that you money is going to the appropriate creditors in a timely manner
- 3Intimidating sales tactics that compel you to make big decisions in a pressured environment
- 4Promises that seem too good to be true: these might include enticing offers like a large guaranteed reduction to your debts or stopping any legal proceedings that creditors are taking against you
Before signing on to a debt relief plan with any company, you want to find out your quality for their program.
You will also want to have a clear and transparent understanding of the fees the company will expect you to pay and make sure that there are no surprise fees that come with what you are signing up for.
You will also want to be informed about which creditors are being paid through the debt relief program (you want your payments going to right places) and finally, be aware of the tax implications of joining an agreement with a debt relief program.
In some cases, people who enroll in debt relief programs leave them with less money than they started with.
This is why it is so important to learn about the options available to you and consult with a professional. Remember that if something seems too good to be true, then it most likely is.
Tips on Dealing With and Avoiding Debt
Whether you are currently dealing with managing your own debt, or want to be informed to avoid debt in the future, here is some advice to adhere to:
- 1Don’t let debt pile up: come clean to creditors by contacting them as soon as you have to miss a payment. An honest explanation of your financial situation might help you qualify for a “hardship program” that could lower your interest rate or waive penalty fees.
- 2Speak with a non-profit credit counsellor who can help you have a better understanding of your financial situation (and oftentimes, this consulting is free).
- 3Create a budget to ensure that you are tracking your spending, and only making purchases that are within your means. Cut spending where you can, and make adjustments to your budget when you anticipate that your life situation might change.
- 4Prioritize your secured debts (for example, your car loans or mortgage) over unsecured debts (like credit cards) to avoid losing your collateral.
- 5Don’t make any decision surrounding your debt that is pressured out of you, whether from collectors or debt relief companies: trust your gut, do your research, and make decisions you are confident in.
Overall, debt relief, depending on the individual, can be a fresh start towards financial stability or a misstep that leaves a person with less money than they started with.
Be careful, informed, and seek professional advice to make sure that each decision you make regarding your debt management is a step in the right direction for you and your dependents.