Debt Relief: Understand Your Options and the Consequences

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Debt Relief: Understand Your Options and Consequences
Debt relief can help ease the burden of a massive debt however it's not suitable for all. Here are options to explore.
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 holds a bachelor's diploma in journalistic studies from Auburn University and a master's in education from Georgia State University. Prior to joining NerdWallet, she worked for newspaper publishers, including daily ones, MSN Money and Credit.com. Her work has been featured in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and other publications. Twitter: @BeverlyOShea.





7 January 2023


Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years working at The Oregonian in Portland in roles including copy desk chief and team editor and designer. Her previous experience includes the editing of copy and news at many Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communications and journalism at The University of Iowa.







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Find that you're just not making progress on your debt, no matter how hard you try? If so then you may be in the middle of massive debt.
To break free of debt, you should look into your debt relief options. These tools can alter the conditions or amount to help you be back on track faster.
But debt-relief programs are not the ideal solution for everyone. Moreover, it's important to understand what the potential consequences could be.
Debt relief could involve wiping the debt completely out through bankruptcy, obtaining changes in your interest rate or payment schedule to lower your payments or convincing creditors to to pay less than full amount owed.
When should you seek debt relief


Take into consideration bankruptcy, debt management or debt settlement when either of the following is true:
There's no chance of paying off unsecured debt (credit cards or medical bills and personal loans) within the next five years, regardless of whether you implement drastic measures to reduce expenditure.
The sum of your unpaid unsecured debt is equal to half or more of your total income.

On the other hand If you are able to pay off your debt within five years, consider a self-help plan. It could comprise a combination of debt consolidation appeals to creditors, and more disciplined budgeting.
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Be aware of scams, the negatives of debt relief


The debt relief industry includes fraudsters who want to steal whatever money you have. A lot of people who enroll in programs to help with debt do not complete the program. You could end up having debts that are 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 need to finally get real results.
You must be aware ofand confirm these points prior to entering into any agreement:
What are the requirements to be qualified.
What are the fees you'll have to have to pay.
Which creditors are receiving payments and at what amount; If your debt is placed in collections, ensure you understand who owns the debt and that the payments go to the appropriate agency.
The tax implications.

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Debt relief through bankruptcy


There's little point in entering an agreement to settle your debt or entering into a debt management plan if you're not going to be able pay the amount the terms agreed upon. We recommend talking with an advisor before you pursue any other debt relief strategies. Consultations are generally free, and if you don't qualify, you can move on to different possibilities.
The most popular type of , Chapter 7 liquidation, can erase the majority of credit card debts, unsecured personal loans and medical debt. It is possible to complete the process in three or four years depending on your eligibility. You should be aware of:
It's not going to erase your child support obligations as well as the student loan debt is extremely likely to be forgiven.
It can be detrimental and remain in your credit file for up to 10 years even as you try to rebuild your credit score. But, if your credit score is already poor bankruptcy could help you rebuild your credit much sooner instead of trying to pay back. (Learn more about when .)
If you have used the services of a bankruptcy attorney , your bankruptcy filing makes the co-signer responsible for the debt.
If debts continue to pile up, you won't be able to apply for a new loan for the next eight years.
It may not be the best option in the event that you must surrender property you wish to keep. The rules vary by state. In general, certain types of property are exempt from bankruptcy, such as vehicles up to a given value as well as a part of the equity in your home.
It's possible that it's not needed in the event that you're "judgment proof," which means you do not have any income or property a creditor can go after. Creditors can still be able to sue you and receive a judgment, but they won't be able to get their money back.

Additionally, not every person who has a lot of debt is eligible for. If your earnings are above the median of your state and your family size or you have an asset you wish to avoid foreclosure and you are in need of a loan, you might have to apply in Chapter 13 bankruptcy.
is a three or five-year court-approved repayment plan, based on your income and the amount of debt. If you are able to adhere to the plan for its full duration, the rest of your unsecured debt will be eliminated. It will take longer than a Chapter 7 -- however, if you're in a position to make your payments (a most people are not) then you'll be able to keep your home. A Chapter 13 bankruptcy stays on your credit report for seven years from the filing date.
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Help with debt management through debt relief plans


A allows you to pay your unsecure debts- typically credit cards -fully, but typically at a lower cost or fees reduced. The only payment you make is every month to a credit counseling agency, which distributes it among your creditors. Credit counselors and firms have agreements that are long-standing in place to help debt management clients.
Credit card accounts will be closed and, most of the time you'll be forced to be without credit cards until you complete the plan. (Many people don't complete the plan.)
The debt management plans themselves will not impact your credit scores, but closing accounts can harm your score. After you've completed the program you are able to apply for credit once more.
Insufficient payments could take you out of the plan but. And it's important to pick an agency that is accredited by the the . However, you must ensure that you understand the fees and the options you be able to use in dealing with debt.
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Relieved through debt settlement


is a last resort option for people who are in a state of overwhelming debt but cannot qualify for bankruptcy or simply don't want to declare bankruptcy.
Companies that offer debt settlement typically ask you to stop paying your creditors and instead deposit the funds into an Escrow account. Each creditor is approached as the money is accumulated in your account, and you fall further and further behind in payments. A fear of not getting anything even a single cent could cause the lender to make a smaller lump-sum offer and not pursue you for the rest.
Not paying your bills can cause collections calls, penalties and, possibly, legal action against you. Debt settlement stops none of that while you're still bargaining. It can take several months for the settlement to be implemented. In the case of how much your debt is, this process can take years and the continued payment lateness can further harm your score on credit.
You may also face a bill for taxes on forgiven amounts (which the IRS counts as income). Lawsuits can lead to wage garnishments and property liens.
You can attempt to , or you can hire a professional. The industry of debt settlement is riddled with bad actors However, The Consumer Financial Protection Bureau, the National Consumer Law Center and the Federal Trade Commission caution consumers in the most stern words.
Certain of these companies declare themselves to be . They are not. Consolidating debt is something you can do on your own, and it will not affect your credit.
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Do-it-yourself debt relief


There's nothing to say you shouldn't be able to borrow from any of the above-listed debt relief options and create your own plan.
You can do what credit counselors do in debt management plans: Contact your creditors, and explain to them why you're in debt and what concessions you'll need in order to get caught up. Most credit card companies have programs for hardship and may be willing to cut the interest rate and eliminate charges.
You can also educate yourself on debt settlement and then negotiate an agreement by contacting creditors yourself. (Learn how you can .)
If your debt isn't unsurmountable alternatives to paying off debt could be possible. For example, if your credit score remains excellent, you might be able to get a credit card that offers a zero-interest balance transfer program that will allow you to breathe. You could also find a credit card one with a lower rate of interest.
The options you have available won't affect your credit score, so long as you pay the required payments, your credit score should be able to recover.
If you choose to do this However, it's essential to establish a strategy to prevent running up your again. It can also be difficult to qualify for an additional credit card or loan in the event that you're heavily in debt, because that frequently leads to late payments or high balances and those hurt the credit score.
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What is not to do


Sometimes, debts become overwhelming and come with a devastating speed such as a health issue or job loss or natural disaster. Maybe it was in small increments but now collection agencies and creditors insist on paying the bill, but you're unable to.
If you're struggling with debt Here are some tips not to do:
Don't neglect a secured debt (like car payments) to settle an unsecure one (like hospital bills (or credit card). It is possible to lose the collateral to secure the debt, which is in this instance your car.
Don't take out loans against the equity of your home. You're putting your house at risk of foreclosure and could be converting unsecure debt that can be eliminated through bankruptcy, into secured loans which isn't.
Don't withdraw money from your . This reduces the chance of having a financially secure retirement.
Think twice about borrowing money from your retirement account at work in addition. If you are fired, the loans could be withdrawn in error and lead to a tax bill, which is the last thing you want to happen.
Don't base your decisions on which collectors are pressuring you the most. Instead, you should study your options and pick the one that is best to suit your needs.

Are you ready to take on your debt?
Keep track of your spending and balances all in one place to track your way out of debt.








The author's bio: Bev O'Shea worked as a writer for credit at NerdWallet. Her work has been featured in the New York Times, Washington Post, MarketWatch and elsewhere.







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