If you’ve been coping with debt that is causing financial stress, you may have considered a debt relief program to alleviate your debt burden. But there are many companies out there claiming to get results for debt help that it’s hard to know what information is reliable or not. Do debt relief programs work, and if so, what kind of results can you actually expect?
How Debt Relief May Help You
In the best cases, debt relief programs can substantially reduce your monthly unsecured debt payments and can even reduce penalties and interest charges on past-due accounts that are snowballing out of control.
Keep in mind that technically, bankruptcy is another form of debt relief, and the consequences are much higher and long-lasting than with consumer debt relief programs that focus on debt settlement.
What Percentage of My Debt Will Collectors Settle For?
Debt collectors may settle for as little as 50% of the outstanding balance when negotiated correctly. Offering a lump-sum payment can often get you the best results, but a series of payments can sometimes result in large discounts as well. Just be sure that whatever debt relief program you choose, you are certain you can follow through on your end of the deal.
Does Debt Relief Hurt Your Credit Score?
Not all debt relief methods are equal, and some may have a much more significant negative effect on your credit score and for a more extended period of time.
Debt consolidation plans can move around the balances on cards, affecting the utilization rates, which is a major factor in credit scoring. But once these plans are paid in full, the credit effects aren’t as lasting as with bankruptcy.
Credit counseling is the least impactful to your credit because you’ll still be technically paying on your accounts as agreed, just with different terms. That said, if you also close credit cards in the counseling process, you can affect the overall credit utilization average along with account age average, which could drop your score potentially.
It’s important to note that if you go with more significant forms of debt relief such as debt settlement or bankruptcy, your credit score can be severely impacted for a considerable amount of time until the debts have been totally cleared and enough time has passed for the negative marks to drop off your credit report. For bankruptcy, it can take seven to ten years before being removed from your credit report.
What Type of Debt Qualifies for Debt Relief?
Unsecured debt such as credit cards, personal loans, and medical collections can qualify for debt relief programs much of the time. Typically, secured debt such as home mortgage loans, auto loans, and student loans can’t be included in debt relief programs. These lenders must be dealt with directly if you need to modify the repayment terms to something more manageable.
When Should You Seek Debt Relief?
If you’re facing a financial crunch because of numerous heavy unsecured debt payments each month, there are some options to get relief, but each will depend on how severe your financial circumstances are.
For example, if you don’t currently have enough income to cover your unsecured debts, and you have no way of increasing it, debt relief companies like Alleviate Financial debt management program could be a good choice.
Bankruptcy is typically better for financial situations where there is a lot of debt that’s both unsecured and secured, and there’s no hope in the foreseeable future to be able to meet the loan obligations on time. If your total debt payments are half or more of your gross income, you’ll probably be able to establish a debt relief program to alleviate your financial stress.
That said, if you have the ability to pay off your unsecured debt in less than five years on your own, that’s the best option, as it will have the lowest impact on your credit score in the near-term future.
What Are the Risks Associated With Debt Relief?
There are numerous positives to seeking debt relief help, but there are also plenty of risks to keep an eye out for. Not all types of debt relief have the same consequences, so it’s important to carefully weigh the options between each type of debt relief to maximize your financial benefits.
Debt consolidation loans can sometimes include origination fees and your credit card companies may charge balance transfer fees to roll their balances to the loan. Depending on how much interest you’ll be saving, this may or may not be worth it in the long run. So make sure that the interest rate on the consolidation loan is well below the rates you’re currently paying.
With debt settlement, your credit may be impacted during the time it takes the debt settlement company to negotiate with your creditors and establish a payment structure that works for your financial situation.
Until the debts are completely paid off via a lump-sum payment or a payment plan, your credit will take a dip. But keep in mind, during this time the point is to save money, not add more expenses, so consider this a time to establish good financial habits. In the long run, your credit will be better off and your financial position much stronger.
Both credit counseling agencies and debt settlement companies do charge fees for their services, so that’s another consideration to weigh when it comes to getting debt relief. Although credit counseling agencies can be less costly, it’s still not free, so be sure the cost is worth the financial benefit.
Also note that there may be tax implications for debt settlement. When there is a difference between what you owe and what the creditor settled the debt with you for, that savings may be considered taxable income by the IRS, so check with your tax professional to be sure of what you’re getting into with this form of debt relief.
Have you been curious about how much financial stress you can alleviate by getting assistance with a debt relief program? Alleviate Financial is here to help you with debt advice that considers your entire financial picture.
From the first call, your expert debt relief team will take the time to understand your needs and come up with the best debt relief plan available. Contact us today and start on the road to financial stability.
