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Debt Relief: Understand Your Options and the Consequences

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Debt Relief: Learn Your Options and Consequences
Debt relief may ease the burden of a massive debt, but it's not right 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 education in journalism at Auburn University and a master's in education from Georgia State University. Prior to joining NerdWallet, she worked for 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 many other places. Twitter: @BeverlyOShea.





7 January 2023


Written by Kathy Hinson Lead Assigning Editor Personal financial, 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 positions such as copy desk chief and team director of design and editing. Prior experience includes writing copy as well as news editing for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in journalism and mass communications at the University of Iowa.







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Find that you're just not seeing progress in your debts regardless of how hard you try? If this is the case then you may be in the middle of overwhelming debt.
To break free of the financial strain, you should look into your debt relief options. These tools can change the terms or amount of to help you recover faster.
But these programs aren't the right solution for everyone. Moreover, it's important to understand what the consequences might be.
Debt relief can involve slicing the debt completely out in bankruptcy; obtaining adjustments to your rate of interest or payment schedule to make your payments lower or convincing creditors to agree to pay less than the total amount due.
If you are in debt, it is best to seek relief


Take into consideration bankruptcy, debt management or debt settlement when either of the following is true:
You have no hope of resolving your debts unsecured (credit cards, medical bills, personal loans) in the next five years, regardless of whether you make drastic efforts to reduce spending.
The amount of your unpaid unsecured debt must be at least half of your income.

On the other hand it is possible to repay your unsecured within five years consider a do-it-yourself strategy. It could comprise a combination of debt consolidation as well as appeals to creditors. stricter budgeting.
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Be aware of scams, the negatives of debt relief


The debt relief industry includes fraudsters who want to take what little money you have. Many people who enter programs for debt relief do not complete their obligations. It is possible to end up with debts that are even larger than the ones you had when you first started.
However, debt relief could give you a fresh start, or the breathing room that you require to finally achieve real progress.
Make sure you are aware of -- and verify -- these points before entering any agreement:
What are the requirements to be qualified.
What are the fees you'll have to pay.
Which creditors are receiving payments and at what amount; If your debt is placed in collections, make sure you know who owns the debt, so that payments are made to the appropriate agency.
The tax implications.

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Relief from debt through bankruptcy


It's not worth entering an agreement to settle your debt or entering into a debt management plan when you're not likely to be able pay the amount the terms agreed upon. We suggest speaking with someone first before you pursue any other debt relief strategies. Initial consultations are often free, and if you aren't eligible then you are able to move on to other alternatives.
The most popular type of liquidation, Chapter 7 liquidation, can erase most credit card debt, unsecure personal loans and medical debt. It can be done within three or four months if you qualify. You should be aware of:
It will not erase obligation to support children or student loan debt is extremely unlikely to be paid back.
It can be detrimental and remain the credit score for up to 10 years while you try to rebuild your credit score. However, when your credit score is already poor it is possible that bankruptcy will help you rebuild your credit sooner instead of trying to repay. (Learn more about when .)
If you've used the services of a bankruptcy attorney , your bankruptcy filing makes the co-signer responsible for the amount owed.
If the debts keep piling up, you won't be able to file another for eight years.
It might not be the best option in the event that you must sell the property you would like to keep. The rules are different for each state. Typically, certain kinds of property are not subject to bankruptcy, for example, vehicles with a specified value, and a portion of the equity of your home.
It's not necessary if you're "judgment proof," which means you don't have any income , or property that creditors can go after. However, creditors are still able to sue you and get a judgment, but they won't be legally able to take the money.

In addition, not all people with a large amount of debt can qualify for. If your income is 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 make an application in Chapter 13 bankruptcy.
is a three- or five-year plan of repayment that has been approved by a court, based on your earnings and debts. If you're able adhere to the plan throughout its duration, the rest of your unsecured debt will be discharged. It'll take longer than the Chapter 7 bankruptcy, however, if you're capable of making your payments (a majority of people are not), you will get to keep your home. The Chapter 13 Chapter 13 bankruptcy stays on your credit report for seven years from the date of filing.
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Help with debt management through debt relief plans


A permits you to pay your unsecure debts- typically credit cards -completely, however typically at a lower rate of interest or with fees waived. It is a one-time payment each monthly to an credit counseling organization that distributes the money among your creditors. Credit counselors and credit card companies have longstanding agreements in place to help debt management clients.
Credit card accounts will be shut and, typically you'll be forced to live in a debt-free state until you complete the plan. (Many people do not complete them.)
Debt management plans themselves do not impact your credit scores But closing accounts may harm your score. After you've completed the program it is possible to make a new application for credit.
Insufficient payments could take you out of the plan though. Also, it's crucial to select an agency accredited by the the . Even then, make sure you understand the fees and other options you could be able to use in dealing with the debt.
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Relieved through debt settlement


is a last resort option for those with a lot of debt, but don't qualify for bankruptcy, or don't wish to file bankruptcy.
The companies that negotiate debt typically request you to stop paying your creditors and instead deposit the funds into an account called an escrow. Each creditor is approached in the same way as the money accumulates in your account, and you fall further and further behind on your payments. Fear of getting nothing at all may motivate the creditor to take the offer of a lesser lump sum and then agree to not pursue you for the rest.
In the event that you don't pay your bills, it could cause collections calls, penalty charges and, potentially, legal action against you. The debt settlement process stops all of that , even though you're in negotiations. It could take several months for the settlement to be implemented. Based on the amount you owe, the process can take years , and the continual instalments further erode the credit rating.
There is also the possibility of tax charges on the forgiven amounts (which the IRS considers income). Legal actions can result in tax liens on property and wage garnishments.
You can try , or you can hire a professional. The industry of debt settlement is rife with scammers However, the Consumer Financial Protection Bureau, the National Consumer Law Center and the Federal Trade Commission caution consumers with the most severe of words.
Certain of these companies claim to be . They are not. Consolidating debt is something you can do by yourself and will not affect your credit.
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Do-it-yourself debt relief


There's nothing to suggest that you shouldn't take advantage of any of the debt relief options and create your own plan.
You can follow the same steps credit counselors use in their debt management strategies: Contact your creditors, and explain to them why you fell behind and what concessions you'll need in order to get caught up. The majority of credit card companies offer programs for hardship and are willing to cut your interest rate or waive fees.
You could also learn about debt settlement and reach an agreement with creditors by calling them yourself. (Learn how you can .)
If your debt isn't unsurmountable alternative debt-payoff strategies may be available. For instance, if your credit score remains satisfactory, you may be able to apply for an account with a 0% balance transfer rate that could provide you with some breathing room. You could also find a credit card one with a lower rate of interest.
Those options won't hurt your credit score, so long as you pay the required payments and your credit score will rebound.
If you choose to do this, however, it's important to have a plan to prevent running up your again. It also can be hard to be eligible for a new card or loan when you're deeply in debt, because that is often the reason for missed payment or high balances which can affect your credit standing.
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What should you avoid doing


Sometimes overwhelming debt comes with a devastating speed like a health crisis or job loss or a natural disaster. Or maybe it came a little at a time, and now creditors and collection agencies insist on paying, and you just can't.
If you're experiencing financial stress, here are some things to avoid doing:
Don't neglect a secured debt (like car payments) to pay an unsecured one (like a hospital bill credit or hospital bill). The collateral that secures that debt, in this case your vehicle.
Don't borrow against the equity of your home. You're putting your home at risk of being foreclosed upon and could be converting unsecured debt that could be wiped out by bankruptcy to secured credit that isn't.
Do not take money out of your . This cuts your chances of financial security in retirement.
Consider avoiding borrowing money from your retirement account at work and. If you lose your job, the loans can become inadvertent withdrawals and lead to taxes, which is the last thing you want to happen.
Don't base your decisions on the collectors who are threatening on you most. Instead, you should study your options and pick the most appropriate one for your situation.

Are you ready to get rid of your debt?
Track your balances and spending all in one place to track the way to get out of debt.








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







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