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Debt Relief: Know your options and the consequences

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Debt Relief: Understand your options and the consequences

Debt relief can ease the burden of a massive debt however it’s not suitable for everyone. Here are some options to think about.

By Bev O’Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O’Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She has a bachelor’s level education in journalism at Auburn University and a master’s in education from Georgia State University. Prior to joining NerdWallet she was employed by daily newspapers, MSN Money and Credit.com. Her work has appeared in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and elsewhere. Twitter: @BeverlyOShea.

7 January 2023

Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years with The Oregonian in Portland in roles including copy desk chief and team leader for design and editing. Her previous experience includes the editing of copy and news at many Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s in journalism and mass communications from The University of Iowa.

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Are you finding yourself not getting any progress on your debt no matter what you do? If this is the case, you might be facing massive debt.

To break free of the financial strain, consider your options to reduce debt. These tools can change the conditions or amount your debt, allowing you to get back on your feet quicker.

But these programs aren’t the right solution for everyone, and it’s important to understand what the consequences might be.

Debt relief could involve wiping the debt completely out in bankruptcy; getting changes on your interest rates or schedule to reduce your payments; or persuading creditors to to pay less than total amount due.

When you should seek debt relief

Consider the possibility of bankruptcy, debt management, or debt settlement when either of these is true:

There’s no chance of repaying unsecured debt (credit cards or medical bills or personal loans) within the next five years, regardless of whether you take extreme measures to cut expenses.

The sum of your unpaid unsecured debt must be at least half of your income.

On the other hand it is possible to pay off your debt in five years, you should consider a DIY strategy. It could comprise a combination of debt consolidation appeals to creditors, and stricter budgeting.

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Beware of scams, debt relief downside

The sector of debt relief includes fraudsters who want to take what little money you have. Many people who enter programs for debt relief fail to finish them. They could be left with debts that are even larger than the ones you had when you first started.

The debt relief program could offer you a fresh start, or the breathing space you’ll need to get real results.

You must be aware of- and verify — these points before entering any contract:

What do you need to know to qualify.

What are the fees you’ll have to have to pay.

What creditors are getting paid and at what amount; If your debt is placed in collections, make sure you understand who owns the debt and that the payments go to the appropriate agency.

The tax implications.

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Relief from debt through bankruptcy

There’s little point in entering an agreement to settle your debt or entering into a debt management strategy when you’re not likely to be able to pay as the terms agreed upon. It is recommended to speak with a first, before you pursue any strategy to reduce debt. Consultations are generally free. If you aren’t eligible then you are able to move on to alternative alternatives.

The most popular type of , Chapter 7 liquidation, can eliminate the majority of credit card debt, unsecured personal loans and medical debt. The process can be completed in three or four years when you meet the requirements. The things you need to know:

It won’t erase or obligations to pay child support, and students loan debt is extremely likely to be forgiven.

It could be detrimental to your credit and will remain in your credit file for as long as 10 years even as you attempt to repair your credit score. But, if your credit is already in bad shape bankruptcy could help you rebuild your credit sooner rather than attempting to repay. (Learn more about the process .)

If you’ve used a , your bankruptcy filing will render the cosigner accountable for the obligation.

If your debts continue to pile up, you won’t be able to apply for a new loan for the next eight years.

This may not be the best choice if you would have to surrender property you wish to keep. The rules differ by state. In general, certain types of properties are exempt from bankruptcy, like vehicles with a specified value, and a portion of the equity of your home.

It’s possible that it’s not needed in the event that you’re «judgment proof,» which means you don’t have any income or property that a creditor could pursue. However, creditors are still able to be able to sue you and receive a judgement, but they won’t be in a position to take the money.

Additionally, not every person with a large amount of debt can qualify for. If your earnings are above the median of your state and your family size, or you have an asset you wish to save from foreclosure and you are in need of a loan, you might have to make an application to file Chapter 13 bankruptcy.

is a three- or five-year court-approved repayment plan determined by your income and the amount of debt. If you’re able stay on the plan over its entire period, any remaining unpaid debt will be discharged. This process will take longer than the Chapter 7 bankruptcy, but if you are in a position to make your payments (a majority of people are not) then you’ll be able to keep your property. A Chapter 13 bankruptcy stays on your credit report for seven years following the filing date.

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Help with debt management through debt relief programs

A allows you to pay your unsecure debts- typically credit cards — in full, but typically at a lower cost or fees reduced. It is a one-time payment each per month, to the credit counseling agency that distributes the money among your creditors. Credit counselors and firms have agreements that are long-standing that aid customers with debt management.

Your credit account will be shut and, in most cases you’ll be forced to go with no credit card until you’ve finished the plan. (Many individuals don’t finish the plan.)

The debt management plans themselves will not affect your credit scores, but closing accounts can affect your score. Once you’ve completed your plan, you can apply for credit once more.

If you don’t pay on time, you could be kicked out of the plan, but. And it’s important to pick an agency accredited by the or the . But, make sure you are aware of the costs and what alternatives you may have to deal with financial debt.

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Relief through debt settlement

is a last resort option for those who face overwhelming debt, but aren’t eligible for bankruptcy, or don’t want to declare bankruptcy.

The companies that negotiate debt typically request you to stop making payments to your creditors and place the money into an Escrow account. Every creditor is approached because the money is accumulated in your account and you fall further and further behind on your payments. The fear of receiving nothing even a single cent could cause the creditor to take an offer that is smaller in lump-sum and not take the remainder.

Paying your bills late could result in collection calls, penalty fees and, potentially, legal actions against you. Debt settlement stops none of that while you’re still bargaining. It can take months for the settlement offer to start. Depending on how much your debt is, this process may take years , and the continual late payments further damage your score on credit.

You could also be faced with tax bills on the forgiven amounts (which the IRS considers income). The law suits can lead to the garnishment of wages and property liens.

You can attempt to make it happen, or hire an expert. The business of debt settlement is full of bad actors however, it is recommended that the Consumer Financial Protection Bureau, the National Consumer Law Center and the Federal Trade Commission caution consumers in the strongest possible terms.

Some of those companies also advertise themselves as . They are not. Debt consolidation is something you can do on your own, and it will not damage your credit.

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Do-it-yourself debt relief

There’s nothing to say you can’t borrow from some of the debt relief options , and make your own debt relief plan.

You can follow the same steps credit counselors use in their debt management plans: Contact your creditors, and explain to them why you’re behind, and then what concessions you’ll need to make to catch up. Most credit card companies have programs for hardship and are willing to cut the interest rate and eliminate fees.

It is also possible to educate yourself on debt settlement and then negotiate an agreement by contacting creditors yourself. (Learn how to .)

If the debt you have isn’t insurmountable alternative debt-payoff strategies may be available. For instance, if your credit score is still satisfactory, you may be able to apply for a credit card with a 0% balance transfer program that will give you some breathing room. You could also find a credit card that has a lower interest rate.

The options you have available won’t affect your credit; provided you keep making the payments, your credit score should rebound.

If you go this route However, it’s essential to establish a strategy that will prevent you from having to pay back your debts. It’s also difficult to qualify for new credit cards or a loan when you’re deeply in debt. This often leads to missed payment or high balances and those hurt your credit standing.

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What is not to do

Sometimes overwhelming debt comes with devastating swiftness such as a health issue, unemployment or an natural catastrophe. Or maybe it came in small increments but the collection agencies and creditors insist on paying but you can’t.

If you’re experiencing financial stress, here are some things to avoid doing:

Do not ignore a secured loan (like a car payment) in order to pay an unsecured one (like hospital bills credit or hospital bill). You could lose the collateral that secures that debt, in this case your car.

Do not borrow against the equity in your home. You’re putting your home in danger of going into foreclosure, and you may be turning unsecured debt that could be eliminated through bankruptcy, into secured loans that can’t.

Don’t take money from your . This will reduce your chance of having financial security in retirement.

Consider avoiding borrowing money from retirement accounts at work as well. If you lose your job the loans could be withdrawn in error and result in taxes which is the last thing you want to happen.

Don’t make decisions based on which collectors pressure your best. Instead, research your options and choose the most appropriate one for your needs.

Are you ready to take on your debt?

Monitor your balances and spend all in one place to track the way to get out of the debt.

About the author: Bev O’Shea is a former credit writer at NerdWallet. Her work has been featured on the New York Times, Washington Post, MarketWatch and elsewhere.

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