At Solvable, our #1 goal is to help you get into a better financial position through honesty, partnerships, community and doing things the right way. Some of the links in this post may be from our partners. Opinions are the author’s alone.
Last Updated on
If you’re dealing with outstanding debt, you aren’t alone. Many people struggle to manage debt, and in some cases, late payments and overdue bills can lead to owing even more. Fortunately, debt relief programs can help you put that stack of bills behind you and take back control of your finances. If you’re wondering, “How does debt relief work?” this article has all the information you need to get started. Find out what your options are for credit card debt relief, how to access the most effective resources, and how long debt relief can take.
When you first realize that you’re in debt, you might be tempted to resolve it on your own. If your debts are relatively small, taking a DIY approach could help you get your debts under control. For example, you could try reworking your budget to cut unnecessary expenses and set aside more money to pay bills. You could try to land an extra part-time job to cover your costs, especially if you can’t realistically cut anything from your budget.
If you’re only behind on one or two credit card payments, you might even consider calling your creditor to work out a repayment plan. Along the same lines, you could consider contacting a housing counseling agency for help if you fall behind on your mortgage payments.
A DIY approach doesn’t always provide sufficient debt relief, especially when you’re dealing with excessive outstanding payments. If you’re facing serious debt-related consequences, such as foreclosure on your home, property repossession, or bankruptcy, consider it a sign that you should seek professional debt relief.
No matter what kind of debt you’re dealing with, there’s a good chance that professional debt relief services can help. These services handle everything from credit card debt to outstanding tax payments to overdue student loans, so you shouldn’t hesitate to get help when you need debt relief.
For most people, credit counseling is the first step in the professional debt-relief process. You can find qualified credit counselors through a number of organizations. Your credit union, financial institution, military base, university, or community organization may be able to connect you with a professional credit counselor. Before you agree to work with anyone, confirm that the organization is legitimate and that the credit counselor is certified in debt management and consumer credit.
You should also make sure that you can afford the credit counseling services before you sign any agreement. While some services are offered free of charge, most charge a nominal fee. Credit counseling programs with high fees or promises of rapid resolutions can be signs of illegitimate operations, so be wary. After all, you’ll want to work with a credit counselor who can help solve your debt problems, not make them worse.
Once you’ve found the right credit counselor, you can start preparing for your first meeting, which lasts about an hour. During an initial consultation with a credit counselor, you can expect to take an in-depth look at your finances. Be prepared to share your sources and amounts of income along with all of your expenses, including both current and outstanding debts.
During follow-up sessions, you’ll work with a credit counselor to devise a budget that accounts for your income and expenses. You’ll also talk over the debts you’re struggling with and devise a plan for debt repayment. While creating an airtight budget and a personal debt repayment plan is enough to help some people get their finances back on track, others need to take additional steps. That’s why credit counselors also can refer you to a debt management or a debt settlement plan that can help you pay back your debts once and for all.
After reviewing your finances and helping you devise a budget, your credit counselor may recommend that you enroll in a debt management plan. This is a common course of action if your current income level simply won’t cover both your recurring expenses and your outstanding debts.
In most cases, the credit counseling organization you’re working with will also oversee your debt management plan. When you enroll in one of these plans, your credit counselor will create a long-term payment plan that accounts for all or most of your unsecured debts. You’ll have to pay a predetermined amount of money to the credit counseling organization every month, and your credit counselor will direct your payments toward your unsecured debts.
When you enroll in a debt management plan, you’ll also give your credit counselor permission to negotiate with your creditors on your behalf. Depending on the types of debts you have and how much you owe, your credit counselor may be able to negotiate lower interest rates or waived fees. That means you could save money while repaying your debts.
While a debt management plan can be a smart solution for many people, it has a few drawbacks. First, debt management plans aren’t quick fixes. Most last for an average of 48 months, or four years, during which you’ll have to make regular monthly payments. Always confirm the duration of a debt management plan before signing up. If you don’t think you can commit to a long-term payment plan, this might not be the right option for you.
You might not be able to apply for additional credit cards or loans or even use the cards you already have while you’re enrolled in a debt management plan. Before making a decision, think carefully about whether you can adhere to these limitations for the next several years.
While debt management plans can provide debt relief for some people, they aren’t options for everyone. If your outstanding debts and your monthly expenses far exceed your income and available funds, you could benefit from a debt settlement program. These programs can be especially effective if you’re struggling with overwhelming debt.
When you work with one of our recommended debt relief programs, you can expect the firm you work with to negotiate debt repayment with each of your creditors. Most debt settlement programs negotiate lump-sum payments with your creditors, but you don’t have to pay off all of your debts in a single payment. Instead, you’ll pay monthly installments to an escrow account managed by your debt settlement program. Ultimately, you’ll pay a settlement that’s less than your total debt, which means this type of program could help you save money.
Before signing up for a debt settlement program, make sure you understand how it works and how long it takes. First, you’ll stop paying your creditors and direct your agreed-upon payments to your account with the debt settlement program instead. You’ll typically have to pay monthly installments for at least 36 months before the program will settle your debts, as it takes at least that long to build up enough to pay off your debts in a lump sum. In some cases, you may have to make additional installment payments, as some debt settlement programs last for 48 months or longer.
During the pre-settlement period, your debts may continue to incur late fees, and you could receive debt collection calls. Talk with your debt settlement program about what to expect, so you don’t encounter any surprises during the process.
Although you might expect your debt settlement program to negotiate all of your debts, legitimate programs can’t guarantee results or specific reductions. Some programs can settle all of your debts in a lump sum, while others may only be able to negotiate the smaller debts. That means you may still be responsible for some debts after your program ends. Make sure you understand the potential risks before you sign up, and devise an effective plan for debt repayment, no matter what the results of your debt settlement program might be.
While professional debt relief can certainly help with debt repayment, it’s important to understand how the plan you choose could affect your finances, both during and after enrollment. Debt management plans don’t automatically lower your credit rating, but if your plan requires you to close one or more credit card accounts, your credit history may appear shorter. Since that’s one of the many factors that shape your credit rating, you could end up with a lower score. During enrollment in a debt management plan, your credit report will feature a notation preventing you from applying for additional credit.
Debt settlement plans don’t automatically lower your credit rating either, but in some cases, they could contribute to a reduced score. For example, some debt settlement programs cause you to incur late fees or negative marks on your credit report, which can impact your score. To avoid issues like this, always confirm that you’re working with a reputable debt settlement company, and don’t hesitate to ask about late fees and credit score impacts before signing up. If there is a potential for a reduced score, it may still be your best option, but make sure you consider anything you need to do in that time period that would be dependent on a credit score.
In addition, debt settlement programs that negotiate with creditors for debt forgiveness could impact your tax burden. You’ll typically have to pay income taxes on any forgiven debts, so ask your debt settlement plan administrator what to expect in advance.
No matter which debt relief solution you choose, it’s important to understand that overcoming debt is a challenging process for most people. After all, debt relief isn’t instantaneous. Instead, it can take months or years. Credit counseling alone typically takes a few months, and it could result in a debt repayment plan that takes a year or more to complete. Debt settlement programs generally take 36 to 48 months to complete, while debt management plans are the longest of all, typically taking 36 to 60 months.
After you complete your plan of choice, you’ll want to make sure that you don’t fall into debt again. To get back on the right track, take smart steps like creating and sticking to an effective budget. Your budget should factor in your current income and expenses, and it should help you avoid taking on unnecessary credit card debt or unsecured loans. Ask your credit counselor for help creating a debt-free budget and get tips for tracking your expenses accurately every month.
Don’t forget to budget for savings. If you encounter unexpected expenses or have a family emergency, you won’t want to fall behind on bill payments or incur credit card debt. Aim to set aside an emergency fund that will support your family for a few months, and you’ll be able to face any serious financial challenges.
If you’ve ever wondered, “Is debt relief legitimate?” now you know that the best professional debt relief companies can help you tackle your biggest financial challenges successfully. Why put off debt repayment any longer? Contact us today to seek the credit card, tax, or student loan debt relief you need.