Debt is like the elephant in the room in most American households. It’s so rampant that in 2017, the Federal Reserve says that Americans have an accumulated amount of $905 billion in credit card debt. Meanwhile, the rate of inflation has outpaced the rise in income. Year after year, the price of basic commodities like food, gas, and housing are increasing, but income is rising by just 28%.
Needless to say, debt has become such a normal part of society. American households carry an average of $15, 654 in credit card debt alone. Debts don’t just impact your financial life; it can also mess up almost aspects of living. According to the Mental Health Foundation, debt can cause restlessness, sleeplessness, anxiety, and depression. Worrying too much about how to pay off debts and still live a normal life can sometimes become too much of a struggle.
Unfortunately, debts don’t go away on their own. And when debts go to the point of overwhelming, borrowers begin contemplating the idea of getting debt assistance.
What are Debt Assistance Programs and How Do They Work?
Debt assistance, also known as debt relief, is the process of settling your debts at an amount that is lower than the original amount you owe from your creditors. In getting debt assistance, you are also enlisting the help of a qualified debt agency or consultant who will represent and negotiate with your creditors on your behalf. The goal of debt relief is to pay your debts at a reduced amount, following one or more of these methods: debt management plan, balance transfer, debt consolidation, debt settlement, and bankruptcy.
During the debt relief negotiation process, you stop paying your creditors until it is finalized and settled. During this time, the debt assistance agency strives to protect you from the creditors or collections agency’s harassing methods of getting payment back. Importantly, the program also recommends a stricter budgeting system so that you are able to save the required amount of money to pay your debts, and in the process, get you back on your feet.
Why Would You Get Debt Assistance?
Debt relief programs come in different types and they are not for everyone. Debt assistance can make sense when your debts are qualified for settlement, such as medical bills, credit card bills and personal loans. Other types of debts like child support, student loans and mortgage are typically not qualified for debt settlement.
Apart from having huge debts, there are other signs telling you that it may be time to consider debt assistance. For instance, experiencing loss of income, disability and medical condition can make huge financial blows. Also, struggling to meet even the minimum amount on your credit bill or are always late with your payments tell you that you might need a hand in getting your debts settled and your finances in order.
Depending on your type of debts, how much you owe and personal and financial circumstances, it pays to inspect the strategies and costs involved in debt assistance programs and decide whether they apply to your case.
Top 5 Debt Assistance Programs
There’s more than one way to get you out of debt, whether fully or partially. These methods are different from one another, and one may be applicable to your unique case over the other. Here’s a more comprehensive description of each debt relief program.
1. Debt Management Plan
If you have multiple huge debts, managing them on your own can be stressful and burdensome. And if the idea of personally approaching your creditors to negotiate and restructure your payments doesn’t appeal to you, you need a middleman. And that middleman does all these for you and all you have to do is send him one monthly payment. In a nutshell, this is the process of debt management plan.
With the debt management plan, the debt relief agency appoints a debt counselor to you. He will face and negotiate with your creditors on your behalf to bring down your debt, by way of lengthening the loan term and reducing the monthly payments, waiving some of the fees or even reducing your interest rate. When your creditors agree to such agreements, you stop sending them payments. Instead, you will only need to send one payment to the debt relief agency and the counselor will the one to distribute the payments to your creditors. This way, your debts are reduced and become less emotionally stressful and financially pressing.
While on the program, the debt counselor will ask you to stop using all your credit cards and to never open new accounts. You may be allowed to keep one card in case of emergencies though, but that’s about it. You should also strive to pay your monthly bill promptly. If you fail to meet these requirements, the debt relief agency may take you off the program.
Also, ask yourself this: can you commit to this program that would take years to complete? Most debt management plans range from 2 to 5 years, during which you won’t be able to open new credit accounts and stick to using one card for emergencies. Also, you need to have a working budget and some extra funds you can easily access for urgent expenses.
Engaging in a debt management plan itself doesn’t hurt your credit score, but it does reflect on your credit report. However, it can affect your credit score because you’ll be closing old accounts, which in turn, decreases your credit limit. But if you’re able to promptly provide payments over the course of the program, your credit score should start improving some time soon.
2. Balance Transfer
If you have a couple of high-interest credit card debts that you’d like to get rid of, your ideal debt relief method is the balance transfer.
Balance transfer works by opening a new credit card with low or preferably, zero interest rate. You then transfer all the existing credit card debts to the new one, effectively reducing the interest on your debts for a certain period of time.
Balance transfers are not a permanent fix to your debt dilemma, as most of these cards are offered within 18 to 24 months promotional period. How then does balance transfer give you debt relief? Well, you just need to do the math and make sure that you’re able to pay the new monthly bill with lowered (or possibly zero) interest within the grace period. After the grace period has expired, this new card will take up a new and higher interest rate, which then applies to any excess debt you have on the card.
Are you considering doing a balance transfer? Make sure to shop for the best and right card carefully. Space out the inquiries over several months as hard inquiries can impact your credit score. Also, it’s best to automate your payments to make sure you don’t miss another credit bill.
3. Debt Consolidation
Debt consolidation works by taking out another loan, use this loan to pay off all or some of your debts, and then deal with a lower monthly payment and reduced interest rate. Debt consolidation can be the best resort when you have several kinds of unsecured debt, such as credit card bills and personal loans.
While debt consolidation doesn’t reduce the total amount of debts you owe, it does bring down your monthly debt payment. It also helps you to simplify the repayment process as you now have only one debt to deal with, one creditor and one interest rate. Depending on the type of debt you have, you may consolidate your debts by taking out personal loans, do a balance transfer or take out a home equity loan.
Within the debt consolidation program, your debt consolidation process starts with a consultation. You and the debt consultant will pore over the debts you have and come up with the best figures. Ideally, you should be able to borrow a good amount that will cover all the debts you wish to consolidate, but at a much lower rate than you’re currently paying.
What’s good about debt consolidation is that you get to keep your accounts alive. Closing your credit lines and accounts for purpose of debt relief can harm your credit score. However, depending on your agreement with the credit counseling agency, you might have to deal with this new debt for a longer period of time.
4. Debt Settlement
If you’ve missed a lot of your payments to the point of delinquency, even default, it may be time to contemplate getting a debt settlement. This debt relief method is best used for debts that are in collection, along with other financial obligations such as medical bills and private student loans.
The debt settlement program works by getting a professional credit or debt expert to try to negotiate the debt on your behalf. The goal of the settlement is to ask the creditors to agree for a payment that’s lower than the true amount you owe. When the creditor agrees to this offer, you give them the lump sum of the agreed amount and you’re off the hook.
However, a lot of things come into play during the debt settlement process. First, expect that you will be required to generate and save enough money to pay the creditor later on. The funds shall be set aside on a separate dedicated account. You also have to stop paying your creditors so that you’re able to generate enough money to offer in your lump sum payment later on.
Once you’ve had enough, the consultant shall make the offer. The creditor may or may not accept the offer, but the process shall go on back and forth until the agreement is finalized. The debt shall be discharged but it will reflect as negative information on your credit report. You may be debt-free, but the settlement shall affect your history for a good seven years.
Bankruptcy doesn’t sound too appealing, but for people who are their financial worst, this can be the ultimate salvation.
As a debt relief method, bankruptcy will never come off the initial option, but if you and your credit consultant believe that you have too much that you can possibly manage, it may be the best last resort.
In bankruptcy, you will be discharged of your debts. You could lose most of your money and even some of your assets. But you can start afresh. It’s a great opportunity to rebuild your life.
You could either file for Chapter 7 bankruptcy, most, if not all, of your unsecured debts shall be eliminated. Meanwhile, Chapter 13 bankruptcy allows the court to restructure your debt and give you 3-5 years to settle it with continuous monthly payments.
If your debts are so huge and severe, bankruptcy is probably the relief you need. But also think of the consequences: bankruptcy on your credit history can affect your score significantly, and it will stay on your records for seven years.
Contemplating debt relief programs is a tell-tale sign that you are not on track with properly and wisely managing your finances and you want to redirect your financial life. In certain methods, like settlement and bankruptcy, your credit score could take a severe hit, and it’s probably in a bad shape already. Still, you’re acknowledging that you have a problem and that you want a solution for it.
Before you delve into debt relief programs, you can try to fix things yourself. Get in the habit of tracking your expenses, tighten your budget and never miss another payment. But it’s not the same for everybody, and sometimes, an intervention of a debt relief program is just what they need to make things right again.
Now, these are not light matters. You need to sleep on them, do your own due diligence and pick the credit or debt counseling agency that you believe has your best interest at heart. Also, consider that getting into debt relief programs don’t always come for free, so you need to make sure that this added expense shall be worth it at the end.
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