If you've ever borrowed money and struggled to pay it back, you're not alone. Nearly 80% of American households carry some type of debt, and 35% carry credit card debt, known for its especially high interest rates. If you've found yourself struggling to repay debt, finding a good debt relief plan might help you repay your debts and get your finances back on track.
It’s important to know that debt relief plans require a long-term effort. In most cases, it will take several years to reduce your debt or erase it completely, if possible.
The good news is that debt relief plans often make your monthly payments more manageable. Lets understand how debt relief plans work and how they can impact your personal finances.
Types of Debt Relief
Is debt relief a good idea? Sometimes yes, and sometimes no. It all depends on your personal circumstances and the type of debt relief you’re considering.
- Debt consolidation: Debt consolidation providers can help you combine multiple debts into a single debt. Only having to worry about one monthly debt payment can significantly aid you in organizing your finances. However, it's not guaranteed that the monthly payment will be lower than what you're paying now.
- Settlement: A debt settlement is an arrangement where you pay less than you owe to your creditor. If the creditor agrees to a debt settlement, your remaining balance is forgiven. You can negotiate with the creditors on your own or you can hire a debt relief company to do the negotiations for you. The downside is that you’ll need to let your debts become past due before using a debt settlement strategy, which will negatively impact your credit score.
- Bankruptcy: Bankruptcy is a legal proceeding that allows you to erase certain types of debt completely. While it can provide relief from onerous payments, it will also hurt your credit score for years.
- Refinancing: Refinancing is similar to debt consolidation. It involves taking out a new loan - hopefully with better terms - to replace your current loan. If you manage to get more favorable loan terms, you can then lower your monthly payment.
- Government programs: There are a number of state and federal debt relief programs that can help with mortgages, student loans, and medical bills, among other things. The government also provides some protections for consumers from being harassed by debt collection agents. There is no comprehensive government debt relief program, but they may be able to help.
What to Avoid
Is debt settlement a good idea? It can be, but there are also some pitfalls you’ll want to avoid.
- Scams and fraud: Unfortunately, the debt settlement space comes with the risk of scams and fraud. Because of this, it is critical to be sure any company you work with for debt relief is legitimate. You’ll definitely want to check with the Better Business Bureau before working with any debt relief company.
- High-interest loans: Many debt relief companies help you by providing debt consolidation loans. That can be a good tactic, but only if the terms of the new loan are better than the terms on your existing debts. Be careful that you aren’t getting roped into a loan that lowers your monthly payment, but has a longer repayment term and higher interest rate as that will cost you more in the long run.
- Unlicensed companies: There are many regulations and licensing requirements in the debt relief space, all of which were created to protect consumers. This means you’ll want to be sure the company you work with is licensed to provide debt relief services in your state. Unlicensed companies are more likely to be running a scam. You can check with your state’s attorney general’s office to learn if a particular firm is licensed.
- Upfront fees: While it is reasonable to expect fees for debt settlement services, it should not be a requirement to pay upfront fees before the company provides any services. In most cases, debt settlement companies will charge a percentage of what you owe to settle your debt. When considering the percentage you should expect to pay to settle your debt, understand that 15-25% is standard in the industry. Debt management plans often come with set-up fees and monthly charges, while consolidation loan services may charge origination or other fees. None of these legitimate fees need to be paid upfront.
- Long-term debt management plans: Debt-management plans will collect a monthly amount from you and use that to pay all of your existing creditors. Of course there is also a monthly fee for debt management plans. The upside to these plans is that they usually protect your credit score. However, you should not enter into a debt management plan that lasts for longer than a year or two. That should be long enough to get your finances in order. Any longer and it may be that the debt management company is just looking to continue collecting its monthly fee from you without providing much value.
How to Protect Yourself
- Research before signing up: The best way to protect yourself from debt relief scams and unscrupulous debt settlement companies is to do your research before agreeing to any plan. You can start by looking through Lendstart's list of the most reputable debt consolidation providers. You can also check with your state attorney general and with the Better Business Bureau to assess if the organization is legitimate.
- Check for licenses and accreditations: While doing your research, you can also check to see if the company is licensed, and if it is accredited by any official organization. For example, the Better Business Bureau does provide accreditation and a score for the companies it has accredited. If the company has a B rating or better it’s likely a good sign.
- Read the fine print: Make sure you know exactly what you are agreeing to by reading all the documents sent to you. All too often, people assume that certain terms and fees are "industry standard," but they may not be. What is standard for the debt relief company might not be acceptable for you. Make sure to be aware of the impact on your credit score that working with a debt settlement provider may have.
- Get multiple quotes: It’s never a bad idea to shop around, and debt relief services are no expectation. You might be able to get the same level of service, or a better level of service, for a lower price when you compare several different companies.
- Consult with a financial advisor: If you have any questions about the services being provided by a debt relief company, or the charges for their services, then don’t hesitate to consult with a financial advisor. Not only can they help advise on the standard practices and charges in the debt relief industry, they may have information about individual companies gained from working closely within the financial industry.
Remember, when looking for debt relief or debt settlement services, there are a few things you’ll want to avoid. These include scams and fraud, high-interest loans, unlicensed companies, companies charging upfront fees, and long-term debt management plans. Do your research and it should be fairly easy to stay away from all these things. You can get details on individual debt relief companies from your state attorney general, or from the Better Business Bureau. Don’t skip this step, as it can be the most useful way to avoid potential problems. And remember that you don’t have to do this by yourself. There’s plenty of professional help available. By reaching out to a financial advisor or other finance professional, you can easily get answers to your questions and potentially save yourself from excessive expenses and headaches.