Credit is an excellent tool that can be extremely beneficial when properly used. In fact, taking on a certain amount of debt at one point in time can be a great way to secure yourself a good home, higher education, or resources to meet a certain goal. The act has become so normal that millions of Americans have incurred debt at one point in their lives. It helped them finance important and unavoidable expenses that nearly everyone faces. However, problems arise when those debts spiral out of control.
When debts are not paid, due to unforeseen events or improper financial planning, they can affect your financial and psychological well-being, not to mention leaving you with a poor credit score. Things only get worse when you combine a tight financial situation with constant harassment in the form of letters, calls, and threats. Merely imagining the turmoil and stress people can feel in these situations will help you understand why many people look for the fastest way out. The good news is that there is always a way to gain some control in these tough situations – debt relief services.
What is Debt Relief?
The goal of debt relief is to reorganize debt in a way to provide assistance and structure to the indebted party. Debt relief can come in numerous forms. It can involve:
- Requesting creditors to restructure the debt more favorably. This can include a lower interest rate or even smaller monthly payments.
- Negotiating a reduction on the principal amount owed – either partially or fully.
- Extending the terms surrounding the loan.
Whatever form debt relief comes in, the goal always remains to assist people in creating some structure and gradually overcoming their significant debt in the best way possible. Each program is customized to a person’s specific situation and helps them plan out payments while looking for ways to ease the pressure by reducing or eliminating debt.
Tackling Debt on Your Own or Using Debt Relief Services
When it comes to debt relief, people have the option of hiring debt relief services to assist them, or tackling the problem on their own. Many people are unsure if they should spend more money on services, or if they can get rid of their debt by doing the entire process on their own. In order to help you make this decision, we are going to look at both options.
Do-It-Yourself Debt Relief
In certain situations, you might feel like you can handle the entirety of your debt on your own. This makes sense to a lot of people since it means that you will be able to save money on fees. Facing debt on your own will require a lot of courage. While this is doable, it is in no way going to be easy. It will require a lot of time, energy, and hard work to reach your goals. You will need to step up and take charge of reaching out and negotiating with creditors or collectors.
In most cases, your creditors will have a lot more experience in handling these sorts of negotiations. If they sense that you are inexperienced, they will do their best to negotiate the deal in their favor, ultimately costing you more money. The most important thing is to keep expectations realistic. Understand that you are probably not going to get an amazing deal if you lack the negotiation skills necessary. Also, prepare yourself for a long battle. Some forms of do-it-yourself debt relief can take years to get settled.
Additionally, if you are like most Americans, you are not just dealing with one credit card or loan. Most people have multiple credit cards or other unsecured debts, and setting up beneficial agreements with numerous creditors is exhausting and time-consuming. But it doesn’t end there. If you have managed to renegotiate terms to your advantage with a multitude of creditors, you will now have to set up a disciplined system to make sure all the payments are received timely by each creditor on a monthly basis. For many people, this will involve sending payments out by mail to some, while electronically sending payments to 6-10 other creditors.
Professional Debt Relief Services
When it comes to professionals, you need to understand that you are paying them for their expertise and experience. Reputable companies have a lot of experience in handling debts of all sizes. In addition to that, they approach all calls in a calm and collected manner. Their goal, when representing a client, is to help improve their client’s situation as much as possible. They will have thousands of hours of calls and negotiations with numerous creditors under their belts. This means that they are probably going to be more successful in negotiating lower payoff amounts and better terms.
However, there are also some potential drawbacks to hiring a service. The main one is the price. People experiencing financial hardship might struggle to find the money to pay for such services. Fees vary from service to service. Some might charge a fee, while others might charge a percentage of the money saved. Either way, you should be prepared to spend some money for their assistance. That said, most debt relief programs offer monthly payments (with fees included) that are substantially lower than what the average person is paying in minimum payments to their creditors before enrolling.
For some of these reasons, many people prefer hiring the services of professionals. This is because they can hand off the matter to experienced and trained professionals who know how to get the best deal possible. They help you create a plan, and they handle negotiations on your behalf, allowing you to focus on other important aspects of your life. Time is money, and you will lose a lot of time if you are adamant about doing this yourself. Just remember to do some research before committing to a company.
Different Types of Debt Relief
The good thing about debt relief is the fact that there are numerous options. Depending on your current financial situation, you can pick the strategy that will help you the most. Various forms of debt relief include:
- Debt Settlement
- Debt Management
- Debt Consolidation
- Credit Counseling
Whichever method you choose, you must remember to be patient. Debt relief is by no means a quick fix that will get rid of your debt in a matter of months. In most cases, debt relief will take a couple of years before you fully start to see the results. This means that anyone who is beginning a debt relief plan will need discipline. Starting a program and then stopping or not following the structured approach will not only set you back, but it can affect your overall credit history.
Debt Relief – Credit Counseling
The goal of credit counseling is to provide support and guidance around the matter of consumer credit. While there are numerous places you can get credit counseling, it is best to opt for a service that has trained, experienced, and certified professionals. Credit counseling aims to, first of all, provide financial education on how to manage money. They can also assist by contacting creditors and negotiating on behalf of their clients to reduce interest rates or late fees.
Process of Credit Counseling
When it comes to the credit counseling process, you can expect a typical first session to last about an hour. A certified and trained professional will sit down with you and discuss your current situation. They will go through your financial situation and examine your income, assets, expenses, and debts. Once they have a good understanding of your finances and debts, they will help create a personalized financial counseling plan that addresses your economic issues. They will also set up follow-up sessions to see if you are having any difficulties in sticking to the established plan. While this might sound like something simple, many people have difficulties with creating and following a financial plan.
What Type of Debt Does Credit Counseling Cover?
Credit counseling services can only help debtors with unsecured debt. These can include things such as medical bills, credit card debt, unsecured loans, and defaulted auto loans, to mention a few. They cannot negotiate secured debts, such as a mortgage or auto loan, typically. Secured debts are not as susceptible to changes and need to follow the initial agreement.
Debt Relief – Debt Management
Many people confuse debt management with debt consolidation loans. But it is important to make the distinction; debt management does not involve any loans. The goal of debt management is to establish new terms for you to repay your debts. The process involves the debtor or an agency reaching out to the creditor and renegotiating some of the terms around the debt. It also aims to create a system that a debtor can follow to get out of debt gradually. This is usually referred to as a Debt Management Plan or a DMP. Debt management plans aim to get debtors’ spending under control and minimize the damage done to their credit score.
How Can a Debt Management Plan Affect Debt?
A debt management plan is supposed to establish a plan that works for both the creditor and the debtor. During negotiations, they will come up with terms that the debt management plan will take into account. Remember that it is always best to have a written statement from the creditor that confirms they have accepted the terms of the plan. These terms can include a lower interest rate, smaller monthly payments, extended loan terms, and possibly reducing the initial debt owed. Once a DMP is established, the debtor needs to follow it no matter what.
Important Things to Note When it Comes to Debt Management
While a debt management plan might seem appealing, there are things you need to keep in mind before committing to it.
- Repayment plans can take anywhere from 3 to 5 years.
On average, a DMP can last anywhere from 36 to 60 months before being completed. This means that the debtor needs to be committed to sticking to the plan throughout the entire period. Should they stop following the plan, they will lose the right to the terms the creditors agreed upon. This means that reduced interest rates, eliminated fees, and other terms could come back into effect.
- You might be asked to reduce credit card use.
Many debt management plans might require you to stop or at least reduce the use of credit cards. This can be a difficult step for people who have become accustomed to using credit cards in their daily lives.
Debt consolidation aims to make things much more simple for debtors who are struggling with multiple creditors. It is a strategy that aims to gather all unsecured debts and cover them with a single monthly payment. There are multiple options when it comes to debt consolidation. Some consolidation involves taking out a loan and paying off previous debts with the money. Another form of debt consolidation involves going to an agency and having them consolidate your current debts. In that sense, it can be used as a blanket term for both debt management and debt settlement. Usually, people are referring to a loan when they use the term, debt consolidation, but now always. This option will allow you to make one payment each month, rather than making several payments to multiple creditors, whether it’s a loan or a settlement program.
Advantages of Debt Consolidation
- Less Stress – One of the main reasons why people tend to consolidate debt is that it makes things more manageable. Firstly, it eliminates the stress of going through multiple bills and making sure they are all properly filled out and sent. Secondly, it can eliminate calls from multiple creditors and credit card companies. Consolidating debt means you will only have to communicate with one company.
- It Can Save You Some Money – Depending on the consolidation method you choose, you might end up saving some money. If you decide to consolidate with a loan that has a lower interest than your overall interest, you can save money by paying less on the total amount owed. Another great reason why people opt for consolidation is the fact that it can save you money on charges and fees that you spend paying multiple creditors.
Disadvantages of Debt Consolidation
- Service Fees – While you may succeed in avoiding paying multiple creditor fees, you are probably going to have to pay for the debt consolidation service.
- Long-Term Interest Costs – Debt consolidation will sometimes extend the terms of a loan. This means that you could end up paying less on monthly payments but more on overall interest in the long term.
- It doesn’t get rid of your debt – A debt consolidation loan can still be thought of as replacing current debt, with another debt of the same value
Debt Relief – Debt Settlement
Debt settlement is a popular option among people who are struggling to make minimum payments. Debt settlement aims to completely settle unsecured debts for a smaller sum of money than the principal amount owed. While this is a popular form of debt relief, it is not always guaranteed to work. This is where doing business with the right debt settlement company becomes crucial. Success largely depends on the creditors involved, and a reputable company knows ahead of time which creditors are most likely to accept lower settlements or advantageous renegotiation of debt.
Technically, creditors are under no obligation to accept a settlement. While some creditors are willing to settle for less, others refuse to consider offers. In cases where a creditor is willing to settle an account, debtors only end up paying a fraction of the initial debt. Your trusted debt settlement provider can walk you through the process of determining whether your creditors qualify. Most creditors do accept settlements in the end.
How Does Debt Settlement Work?
Generally speaking, debt settlement is only considered by creditors when a debtor has a lot of late or skipped payments. If they believe that an account is not going to pull through and pay the amount initially agreed upon, they are likely to consider settling for less. This is the main debt relief strategy that can reduce the amount owed, though the amounts creditors ultimately settle for can depend on the expertise and strategy of the company you hire. Other techniques can help you manage it if you are current, but they won’t reduce the amount. Creditors or collectors in this situation are looking for a way to get the most money possible from the account. If the debtor continues to miss payments, the creditors stand to lose the entire sum of money.
In order to make a debt settlement program viable, you will probably either be on the verge or are already defaulting on monthly installments. When a debt settlement company gets involved, money will be put aside and collected over a certain period. Once the settlement company working with you believes that you have collected enough money to offer a settlement, they will contact the creditors and begin the debt negotiating process. These negotiations usually result in the debtor paying a lump sum or multi-payment plan, which amounts to less than the original amount owed. Debt settlement means that your credit score is likely to suffer from late payments. However, this drastic step is usually taken by people who are looking to eliminate debt and fix their credit score later. Also, new FICO scoring is starting to emphasize the amount of debt you are carrying more heavily than in the past. This means once the debt is gone, your credit score will be in a position to begin recovering.
Advantages of Debt Settlement
- Avoid Bankruptcy – Many times, the choice of debt settlement is a result of a desire to avoid bankruptcy. People who are financially struggling would prefer to settle their debt for a smaller amount and start building credit later, rather than going through the process of filing for bankruptcy, which can be embarrassing on future applications and involves showing up to court.
- Stop Harassment – Creditors are notorious for constantly contacting debtors that fall behind on their financial obligations. Multiple calls and letters leave many people feeling extremely stressed and anxious. Settling the amount for less can get rid of those stressful calls.
- Settle For Less – One of the major advantages of settling is that it will cut down the amount of money you need to pay off your debt. Significant money is saved.
Disadvantages of Debt Settlement
- It is a Gamble – One of the main cons of debt settlement is that there are no guarantees. As we mentioned, there is no obligation for creditors to accept a settlement, and we again stress that choosing the right company can make a world of difference. A reputable debt settlement company will base their assessment of your creditors based on past experience dealing with the same creditors. So choose wisely. If you stop making payments and then find out that your creditors refuse to settle, your situation could become worse.
- You Need to Have Cash on Hand – Debt settlement requires you to have a large amount of money saved. This means that it could take some time for you to acquire the funds to negotiate a settlement. A good debt settlement company will work with you and your budget to help ensure money is saved at a time that creditors can realistically receive settlement offers.
- Unsecured Loans Only – Debt settlement programs are only an option with unsecured loans. Secured loans that have collateral cannot be settled for less than agreed.
- Paying Taxes – Many people are unaware that the IRS looks at debt settled for less as income. This means that you may have to pay income tax on the amount of money you were able to avoid paying to creditors. That said, the majority of debt settlement clients do not end up remaining on the hook for these taxes, as most CPA’s will fill out a form to show insolvency, proving the program you enrolled in was necessary.
Debt Relief – Bankruptcy
Bankruptcy is a legal process that is meant to help entities facing financial hardship find a way out. The process is designed to discard or pay off unmanageable debt. Bankruptcy is usually the last resort for people who are in severe debt and have no chance of repaying their debt. The goal of bankruptcy is usually to receive a discharge order from a bankruptcy court. This will permanently prohibit creditors from collecting debts owed. Most people will still have to pay some of the money back, however. This is determined by a judge. Make sure you consider all other debt-relief options before considering declaring bankruptcy. If that is the only option left, then make sure you take all the necessary steps to ensure it goes smoothly. Start by contacting a professional bankruptcy lawyer that can help you move forward. (This is not legal advice. To learn more about bankruptcy, it’s best to speak with an attorney.
Types of Bankruptcy (This is not legal advice, speak with an attorney if you are considering bankruptcy)
When it comes to people, there are two popular types of bankruptcies. These are Chapter 7 and Chapter 13 bankruptcy.
This is the most popular form of bankruptcy. Chapter 7 bankruptcy is also known as liquidation since it involves liquidating nonexempt assets to pay off creditors. Chapter 7 liquidation is best for people who have a lot of unsecured debt, no regular income, and do not wish to opt for chapter 13 bankruptcy. Recent law changes have made chapter 7 difficult to achieve.
Who is Eligible for Chapter 7 Liquidation?
- Anyone who passes the means test, which is designed to determine who qualifies for chapter 7
- Anyone who did not have a chapter 7 discharge in the previous eight years or a Chapter 13 in the last six years
- People who have not filed for bankruptcy in the last 180 days and failed to appear in court or dismissed the filing
Chapter 13 bankruptcy, or wage earners bankruptcy, is the second most common form of bankruptcy for people. It essentially restructures debt in a way that allows debtors with regular income to repay at least a portion of the debt over a period of three to five years.
This form of bankruptcy is best for those who have assets they want to retain, like expensive jewelry or secured debts they want to get current on, like a mortgage.
Who is Eligible for Chapter 13 Bankruptcy?
- Anyone with regular income.
- Anyone current on tax filings.
- Anyone that has not filed for Chapter 13 in the last two years or Chapter 7 in the previous four years.
- People that have not filed a bankruptcy petition in the previous 180 days that was dismissed for failing to appear.
There are various debt relief strategies available for people who are struggling with coping with debt. It is important to assess your situation before deciding which option is best for you. If you are looking for a professional organization to help you with your debt, consider reaching out to Churchill Credit Solutions. We are here to help guide and assist you through this complicated period.