Need Debt Relief? Here Are Your Options

Need Debt Relief? Here Are Your Options

By Michael Peterson
In August 31, 2021

When your voicemail is filled with messages from collection agencies and stacks of bills arrive in your mailbox that you have no chance of paying, it’s time for some serious debt relief help. But before you seek relief from a professional, you should understand your options. Some professionals will helpfully walk you through a debt management program or counsel you about the best way to handle your debt, but scammers will take advantage of you unless you know what to look for.

So, when should you seriously consider debt relief?

If you know that you can’t pay off your unsecured debt in five years, even if you make extreme budget cuts or get a second job, it’s probably time for credit counseling. Likewise, if your bills total more than half of your gross income (the amount you earn before taxes are taken out), it’s also time to speak with a debt management company. It’s unrealistic in both of these instances to think that you can handle this amount of debt on your own.

Now, let’s talk about which debt relief programs will work best to help you out of your situation.

Bankruptcy

You’ve probably heard of people filing for bankruptcy but may not understand how it works for individuals who are in debt over their heads. There are two forms of bankruptcy:

  • Chapter 7 bankruptcy is when you go to court and ask that all of your outstanding debt is discharged. It is ideal for those who seek to do away with their unsecured debt such as credit card debt, medical bills, and unsecured loans. Some forms of debt can’t be discharged such as child support payments, taxes, and in most cases, student debt. You must speak to a bankruptcy attorney to find out whether or not you qualify for this type of debt relief.

Chapter 7 bankruptcy comes with some serious downsides. If you have personal property that you want to keep, such as a valuable collection or a second home, you won’t be able to. Also, if you had a co-signer on any of your debt, they would now be responsible for the balance. This type of bankruptcy will stay on your credit report for ten years.

chapter 13 bankruptcy
  • Chapter 13 bankruptcy is different because, with it, you go in front of a judge and ask for your payments to be restructured in a way that makes sense for your current budget and debt load. When the court approves a plan, you will have 3 to 5 years to make the payments. If you stick with the payment plan, the remaining debts will be discharged. This type of bankruptcy stays on your credit history for 7 years.

Debt Settlement

Most credible credit counselors warn consumers to stay away from debt settlement because it can further damage your credit score and isn’t even a guaranteed relief from your debt.

Here’s how it works: The debt settlement company will advise you to completely stop paying your debt for an agreed-upon period, typically 4-6 months. Rather than paying down your debt, you will make payments to the debt settlement company, who is supposed to put your money in an escrow account under your name. 

At the end of your agreed-upon period, the debt settlement company will call your creditors and offer to make a reduced lump sum payment from the money you’ve added to the bank account. The theory is that, out of desperation and wanting to recoup at least a portion of the debt, the creditors will agree to the reduced payment.

But during this time, expect to continue getting calls and letters from the creditors. If things are really bad, you may even be sued for the nonpayment of your debt. And don’t think this type of debt relief will go easy on your credit score. Your months of nonpayment will be reported to the credit agencies, and your credit score will probably end up worse than it was when you started.

Debt Management

If you’re serious about paying off your debt and doing it in a way that’s most beneficial to you and your credit score, you should call a credit counselor at a debt management company. When you work on a debt management plan, you partner with people who have agreements in place with credit card companies. The card companies understand that people who work this way want to pay off their debt, but are experiencing circumstances out of their control.

You will continue to make monthly payments to the debt management company, who will negotiate with the credit card companies for lower interest rates, lower payments, or fees waivers. These new terms will make it easier for you to pay off the debt. And you won’t have to worry about forgetting to make a payment – which would derail the entire plan – because the debt management company uses the payments you make to them to pay down your debt to distribute among your creditors. That’s important because, with this sort of debt relief, your credit score won’t show any missed payments. 

There’s one catch, although luckily it’s overcome easily. As you are paying down your debt, you will have to close your credit card accounts. This is good news on one hand because as you are paying down your debt, the last thing you want to do is rack up more. You will need to learn to stay on a budget in order to function financially without the use of credit while on the program. Most debt management companies will help you build a budget and coach you on how best to make it work with your current income and expenses.

Do-It-Yourself Debt Relief

Some people take matters into their own hands in an attempt to save the nominal fees associated with debt relief. But the truth is that, as a ship must have a captain, your debt relief efforts should be steered by a professional. After all, the people who manage debt relief for others have built relationships with the credit card companies and understand what will and will not work in your situation.If you’re overwhelmed by too much debt and know that seeking debt relief is right for you, why not give us a call? At American Credit Foundation, our experienced credit counselors are ready to speak with you about the most effective debt relief options for your unique situation.

Michael Peterson

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.