Debt Relief Programs: Which Is Right For You?

Andrea Miller
Andrea Miller
February 05, 2019

Debt relief programs offer diverse solutions to overwhelming tax, credit card, student loan, and other types of debt. Because so many types of programs and agencies exist, you must do your research to make sure you are working with a trustworthy firm that offers debt relief solutions for your specific financial situation. Common options for debt relief include consolidation, settlement, management, and bankruptcy. Here’s what you need to know about the pros and cons of each.

Debt Consolidation

If you’re struggling to manage debt from multiple accounts, consolidation could result in one fixed monthly payment with a lower interest rate. With consolidation, you apply for a personal loan at an affordable rate and use these funds to pay off your debts. You could also use a new credit card with a 0% interest rate for balance transfers.

This route is best for those who still have a relatively good credit score. Individuals with lower credit scores will be unlikely to qualify for a loan or credit line at an affordable rate. Debt consolidation will not have a negative impact on your credit score associated with other types of debt relief, provided you pay back the loan or credit line as agreed and avoid accumulating additional debt.

Debt Relief Programs: Which Is Right For You?

Debt Management

Most commonly used with credit card debt, a debt management plan may allow you to access a reduced interest rate or waived late fees. A credit counseling agency will collect a fixed monthly payment that it will then distribute to your creditors. This type of agency has relationships in place that allow them to negotiate with credit card companies on your behalf for more favorable terms.

With a debt management plan, you must close your credit card accounts and may not apply for new credit until you have fully paid off your debts under the plan. Depending on the extent of your credit card debt, this could take several years.

Although entering this type of program does not impact your credit score in and of itself, closing your credit card accounts can damage your score because the age of your oldest account is an advantageous factor.

If you miss any payments, you may be removed from the debt management plan. If you opt to explore this route, make sure you choose an agency with accreditation from the Financial Counseling Association of American or the National Foundation for Credit Counseling.

Debt Settlement

This option involves working with a reputable debt settlement company that will negotiate with your creditors on your behalf. They may be able to access a lower interest rate, a longer payment term, or a reduced balance. In the meantime, you will stop paying your bills while instead making a monthly payment to the debt settlement agency. This amount will be distributed to creditors who agree to settle your debt for less than owed.

If you take this route, you are at risk for collections actions, fines and fees, and even a lawsuit from your creditors. Your creditors may be able to garnish your wages and seize your property to pay the outstanding debts if you are sued. It will take about four to six months before your debt will be settled, or even years if you have significant credit card debt.

Choosing a reputable debt settlement company is essential since unregulated agencies in this industry are notorious for collecting payments from unsuspecting customers and failing to distribute them to creditors. Check ratings and reviews from the Federal Trade Commission, National Consumer Law Center, and Consumer Financial Protection Bureau before working with any debt settlement firm.

Because of the damage to your credit that will ensue when you stop making payments, this is not the best option for most individuals. If creditors do agree to forgive a portion of your balance, you will be taxed as income on the forgiven amount. Consider debt settlement if you do not qualify for bankruptcy or other methods of debt relief.

Bankruptcy

The debt relief programs described above hinge on your ability to pay as agreed. If you are unable to do so, you may want to explore your options with the help of a bankruptcy attorney. Although a bankruptcy filing stays on your credit for up to 10 years, filing for bankruptcy can eliminate most of your unsecured debts or reorganize your debts, so you can afford to repay them.

Chapter 7 bankruptcy is the most common type of filing for consumer debt. If you qualify, it can be used to discharge credit card, medical, and personal loan debt. You will still be responsible for unpaid taxes, child support, and student loan debt. Creditors can no longer attempt to collect this debt or sue you for the unpaid balance. Unlike with other debt relief programs, you will not be taxed for the forgiven balance.

Because of the impact of a bankruptcy filing on your credit score, you will be unable to access affordable credit or qualify for a mortgage. Your job prospects may also be impacted depending on your state and the industry in which you’re employed.

You must pass a means test given by the court to file for Chapter 7 bankruptcy. This test compares your assets and liabilities to determine whether you can afford to repay your debt. If you do not pass the means test, you may qualify for Chapter 13 bankruptcy. With this plan, the court will determine the monthly debt payment you will need to make for three to five years. Once the plan is complete, the remainder of the debt will be discharged.

Fees for bankruptcy range from about $1,500 to $4,000. With Chapter 13, these can be rolled into your overall payment plan.

Finding the right debt relief program for your needs can be daunting, but Solvable can help. We will look at your basic financial information and recommend well-reviewed debt relief companies that specialize in your specific situation. Whether you have credit card, student loan, or tax debt, our service allows you to overcome financial difficulty.

 

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