Debt relief: Is it a good idea?

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In a Nutshell

Debt relief can help make your monthly payments more manageable through debt renegotiation or replacing your debt with a new loan with different terms, including a lower interest rate, waived fees, an extended loan term or reduced balance. And while it may be a tool that helps you avoid bankruptcy, it’s not right for everyone. And it’s important to understand both the benefits and the potential risks before you decide on a debt relief solution.

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If you’re one of the millions of Americans struggling to repay high-interest debt, a debt relief plan may be an option to help you get your finances on track.

But it’s not a quick fix. It’s a long-term solution designed to help you get out of debt over a period of time — typically several years.

Debt relief plans can help make your payments more manageable, but they’re not right for everyone. It’s important for you to understand how each plan or program works and how debt relief can affect your finances.



How does debt relief work?

Debt relief refers to a variety of solutions designed to help make your payments more affordable so that you can ultimately become debt-free. It might include a replacement loan that lowers your interest rate or modifies your repayment term, or you may even see a reduction of the total amount you owe. Specific modifications vary based on the solution you opt for.

If you decide on a debt solution that’s right for you, you’ll want to make sure you make any payments according to the terms of the new agreement of your debt relief plan.

Types of debt relief

There’s no “one size fits all” approach when it comes to debt relief. The solution that’s best for you depends on a variety of factors, including the amount of debt you have, the interest rates on your existing accounts and your overall credit.

Let’s take a closer look at some of the more common types of debt relief.

Debt consolidation

Debt consolidation combines multiple debts into a single, new account. The money from a consolidation loan or balance transfer is used to pay off your existing account balances, and instead of making multiple payments every month, you make just one monthly payment to repay the new account.

To qualify for a debt consolidation loan, you must apply for new credit and meet the lender’s eligibility requirements, which may be difficult — but not impossible — if you have bad credit.

If your debt is mostly made up of credit card bills, you may want to consider consolidating it using a balance transfer card. Balance transfer credit cards may be an appealing option because they often offer an introductory balance transfer APR of 0% for a set period of time.  Like any new credit account, this option is only available for those who qualify.

Need help deciding which option is better for you? We’ve got you covered with our helpful comparison of balance transfers and personal loans.

Credit counseling

A credit counselor can help you with your budget, money management, debt management and credit. After a thorough review of your finances, a counselor works with you to come up with a personalized plan to help you overcome your financial challenges. Credit counseling services are typically offered by nonprofit organizations at no cost — but that’s not always the case, so be sure to check before you work with a counselor.

Learn more about what to expect from credit counseling.

Debt management

If you work with a credit counselor, one of the solutions they may suggest is a debt management plan, or DMP. When you enroll in a DMP, you make a single monthly payment to the credit counseling organization. The organization uses the money to pay your debts based on the payment schedule it establishes with your creditors.

The total amount you owe won’t change, but your credit counselor may be able to negotiate lower interest rates or fee waivers. If you enroll in a DMP, you may have to agree to not apply for new credit while participating in the plan. And you’ll want to review and confirm any changes they’re negotiating on your behalf directly with your creditors.

Learn more about debt management.

Debt settlement

Debt settlement companies negotiate with your creditors and debt collectors to settle your debts for less than what you owe. While that may seem like an attractive option, there are some drawbacks.

There’s no guarantee your creditors will agree to settle on your debt. But even if they do agree, the companies that offer this service sometimes advise clients to stop making debt payments and instead put the money into an account dedicated to paying off settlements. If you follow this advice and stop making your payments, not only will your accounts continue to accrue interest and late fees, which will increase the account balance, but the missed payments in particular can have a significant negative effect on your credit.

Learn more about how debt settlement works — and what to avoid.

Debt forgiveness

Debt forgiveness is when a lender erases part or all of the debt that you owe. A debt settlement company may be able to negotiate a lower lump sum payment to resolve your debt. Or you may be able to negotiate debt forgiveness directly with the lender.

There are also lenders and loan servicers that have special programs in place for people who are experiencing financial difficulty. If you’re unable to make your payments, see if you can apply for a debt forgiveness program through your lender. If approved, a portion or possibly all your debt may be forgiven.

Learn more about debt forgiveness and its potential consequences.

What to know before you apply for debt relief

If you’re having difficulty paying down your debt, a debt relief plan may seem like your only option. While it can help make repayment more manageable, it’s important to understand the potential consequences before you get started on debt relief as a solution.

Scams

Some options, such as credit counseling, debt settlement and debt forgiveness, come with a high risk of scams.

If a debt relief organization you’re considering demands upfront payment, guarantees to settle your debts for a fraction of what you owe, refuses to send free information about its services, or promises to stop all debt collection calls and lawsuits, steer clear. Those are red flags that indicate a possible scam.

Before you agree to work with any debt relief service, it’s important to do your homework. Check with your state attorney general’s office and the Better Business Bureau before you start working with any service to help ensure it’s legitimate. If you want to work with a credit counseling organization, check to see if it’s accredited by the National Foundation for Credit Counseling.

Interest rates

If you’re considering a debt consolidation loan, be sure to compare the interest rate you’d receive on the new loan with what you’re paying on your existing accounts. If you can’t qualify for a lower rate, it doesn’t make financial sense to take out a new loan.

Watch out for loans that lower your monthly payments by extending the amount of time you have to repay the loan. Your monthly payments may be more affordable, but you’ll likely end up paying more in interest over the life of the loan.

Rates and terms vary from lender to lender, so be sure to compare loan offers from multiple lenders before making a decision.

If you opt for consolidating your debt with a balance transfer card, you’ll want to make sure that you can qualify for the promotional 0% APR.

With a balance transfer, it’s important that you can commit to paying off the balance before the promotional period ends. If you don’t pay off the balance, you’ll typically be charged the regular variable APR on the remaining balance. You’ll want to know in advance what the range of that APR will be (it will be spelled out in the card’s terms and conditions) and compare it to the APR you’re currently paying.

If the variable APR on the balance transfer card is higher than what you’re paying now, you may want to calculate what your remaining balance will be and how long it will take you to pay it off to know whether you’ll be saving money in the long run.

Fees

No matter what debt relief solution you choose, it’s important to understand the fees associated with it. Debt settlement services typically charge a percentage, usually 15% to 25%, of the total amount you owe. For example, if you have $10,000 in debt and the company’s fee is 20%, the fee would be $2,000.

Credit counseling agencies offer many services for free, but if you enroll in a debt management plan, it may come with a set-up charge as well as a monthly fee. And some lenders may charge origination or other fees on debt consolidation loans.

Tax implications

If you or a third-party negotiate with your creditors and agree to settle your debt for less than what you owe, the amount you save will likely be considered taxable income. And you might have to pay taxes on it after your debts are settled. Make sure to budget for that as you consider your options.

Program length

Debt relief solutions require consistent, on-time monthly payments — often for years, and unfortunately, many people don’t complete the programs. Before starting any debt relief program, make sure you can commit to it. Otherwise you’ll still have debt to repay and you may not get the fresh start you’re hoping for.

Our picks for debt relief options

If you’ve been trying a DIY approach to your debt payments without much success and you’re considering your debt relief options, here are our top picks for companies that may be able to help you eliminate debt.  

Debt settlement: Freedom Financial

Why Freedom Financial stands out: Freedom Financial reports having resolved over $10 billion in debt since 2002, and the company offers a free, “no-risk” debt relief consultation to help you decide if its program is right for you.

  • Eligible debt — Freedom Financial’s debt relief program helps settle unsecured debts, including credit cards, outstanding medical bills and personal loans. You must have at least $7,500 in unsecured debt to qualify for its program.
  • Fees — Freedom Financial doesn’t charge upfront fees. But if the company successfully negotiates a debt settlement for you, it typically charges a fee of 15% to 25% of your total debt. Fees can vary based on where you live.
  • Client dashboard — Freedom Financial’s client dashboard lets you track your progress so you can see how close you are to paying off your debt.

Debt settlement: Resolve

Why Resolve stands out: Unlike traditional debt settlement companies, which typically charge a fee based on the total amount you owe, Resolve’s debt settlement fees are based on the amount you save by working with the company.

  • Comparison tool — Resolve’s online comparison tool lets you compare different debt relief solutions and provides recommendations about which option is right for you based on your situation.
  • Debt experts — Debt can be a hard topic to negotiate, and you may have questions about the complexities of your situation. Resolve has a team of debt experts available to advise you.
  • Provider network — Resolve works with a network of debt coaches, debt negotiators, credit counselors and attorneys. When you decide which debt relief solution is right for you, Resolve can refer you to one of its partners who will work with you to help you get out of debt.

Debt consolidation loan: Marcus

Why Marcus stands out: If you’re approved for a debt consolidation loan from Marcus, the company will send direct payments to up to 10 creditors, making it easy to pay off multiple debts at once. Since the money is sent directly to your creditors, you won’t be tempted to use it for something other than debt repayment.

  • Good credit required — You’ll likely need good credit to qualify for a loan with Marcus. Most Marcus customers have a FICO® credit score of 660 or above.
  • Fees — Marcus doesn’t charge application, origination, prepayment or late fees, which can add to the amount you have to repay.
  • Ability to apply for prequalification — Marcus uses a soft credit inquiry that lets you see potential loan options without affecting your credit scores. Note: Prequalification doesn’t guarantee you’ll be approved for a loan. And if you’re approved, your actual interest rate and loan term can differ from your preapproval terms.
  • Competitive rates — Marcus offers competitive rates on its personal loans. If approved, your exact rate will be determined based on multiple factors, including the loan amount, term and your credit history. Rates are typically higher for longer-term loans.

Read our Editorial review of Marcus debt consolidation loans.

Debt consolidation balance transfer: U.S. Bank Visa® Platinum Card

Why U.S. Bank Visa® Platinum Card stands out: This credit card comes with a long intro APR offer for balance transfers. There’s an equally long intro offer on purchases, which could be tempting, but any new purchases could just add to your debt.

  • Long intro offer — The U.S. Bank Visa® Platinum Card offers an intro 0% APR for the first 20 billing cycles on balance transfers (as well as on purchases). That’s one of the longest intro periods out there. Note that once the intro periods are over, you’ll be charged a regular variable APR of 13.99% - 23.99% for each.
  • Time limit — To qualify for the intro APR for balance transfers, transfers must be completed within 60 days from account opening.
  • Fees — This card doesn’t charge an annual fee, but you’ll have to pay a balance transfer fee of 3% (minimum $5) per transfer.

Learn more about the U.S. Bank Visa® Platinum Card and browse other balance transfer card options on Credit Karma.

Credit counseling: GreenPath Financial Wellness

Why GreenPath Financial Wellness stands out: Dedicated to helping people across the U.S. improve their financial health, GreenPath Financial Wellness is a member of the National Foundation for Credit Counseling. The nonprofit offers a wide range of services, including credit and debt counseling, debt management plans, credit report reviews and more.

  • Fees — Fees vary by service. GreenPath’s credit and debt counseling and credit report reviews are available for free. But if you choose to participate in a debt management plan, there is a one-time set-up fee of up to $50 and monthly charges of up to $75, depending on the state where you live.
  • Resources — GreenPath offers financial education resources to help you successfully manage your finances independently, including educational articles and videos, online courses, webinars, worksheets and a podcast.
  • Availability — GreenPath Financial Wellness provides online and phone support to people in all 50 states and in-person counseling in certain locations throughout the country.

How does debt relief affect your credit?

Whether you choose to apply for a debt consolidation loan or balance transfer offer, participate in a debt management plan, or settle your debt for less than what you owe, your debt relief solution is likely to affect your credit at least temporarily.

While the prospect of a credit “hit” may feel overwhelming, remember that if you stick with your plan to pay down your debt, any negative impact will likely fade over time. As you reduce your debt and consistently make on-time payments as planned, your scores may improve.

The alternative to debt relief — filing for bankruptcy — can be more difficult to wrap your head around. While bankruptcy is a legal tool that might help you lift some of your debt obligations, its impact on your credit can last up to 10 years depending on the type of bankruptcy you file.


What’s next?

Once you’ve eliminated your debt, it’s important to take steps to avoid accruing new debt. Otherwise you’ll end up back where you started. If you don’t have a budget, that’s a good place to start. A budget provides a roadmap for your spending each month. If you’re spending more than you’re making, it’s important to identify ways to reduce your expenses.

After you create a budget, work on building up an emergency fund. Many experts recommend having at least three to six months of living expenses saved, but any amount will help you avoid taking on additional debt when unplanned expenses pop up — and they will.

Don’t be afraid to ask for help if you need it. Many credit counseling organizations offer basic budgeting, money management and debt management advice for free.


About the author: Jennifer Brozic is a freelance financial services writer with a bachelor’s degree in journalism from the University of Maryland and a master’s degree in communication management from Tow… Read more.