Debt Relief Options

Debt can sneak up on you until you cannot pay your bills and still cover your basic living costs. If you struggle to make the minimum payments on your credit cards, you may qualify for debt relief options. Debt relief options from the least drastic to the most drastic.

Include a debt management plan (DMP), debt settlement, Chapter 13 bankruptcy, and Chapter 7 bankruptcy. This article covers how to qualify for debt relief options and can help you determine which option is best for your situation.

The Problem With Debt

The sneaky thing about debt is that the longer you take to pay it off, the larger it grows and the more it costs you. That’s because the interest charged on your debt will accrue and compound.

Plus, you may be socked with additional late fees and penalties for not paying off your balance sooner. Credit card companies design their minimum payments to maximize the interest you pay and make it easy to run up large balances. 

“The more you delay, the tougher it will be to deal with your debt,” cautions Robert Farrington, founder of The College Investor. “For example, many people who take out credit card debt fully intend to pay off their balances quickly. But sometimes personal circumstances such as divorce, unexpected pregnancy, a job loss, or even unexpected changes to the economy like the pandemic change your ability to repay debt.”

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When to Seek Debt Relief Help

Your debt hits a tipping point when it begins increasing every month instead of decreasing. That’s when you start feeling the consequences of your credit choices, and it can be overwhelming. 

“This can be possible even in cases where you are making your required minimum payments on credit card debt, student loans, or payday loans,” explains Carter Seuthe, CEO of Credit Summit. “Once you’ve hit this point, there’s little you can do to get out without help, and waiting to fix the problem is only going to let more debt build up for you to deal with.”

One indicator that your debt has become problematic is a high debt-to-income (DTI) ratio. How do you calculate a DTI? First, add your monthly debt payments (including your rent or mortgage and accounts like credit cards, auto loans, and student debt – but not living costs like food or utilities). Then, divide that total by your gross (before tax) monthly income. If your rent plus debt payments equal $2,000 per month, and your gross income is $4,000, your DTI equals 50%. 

Research suggests that borrowers with a higher debt-to-income ratio are more likely to have difficulty making monthly payments. It may be harder to qualify for loans or credit when you have a DTI higher than 43%.

“Most people won’t realize they are struggling with bad debt until it reaches a point where they cannot pay their monthly payments any longer or struggle to,” adds Farrington. “It really becomes a serious problem when you can no longer afford to make your payments and you find yourself missing payments or having to make choices about what you are going to pay for that month. Ideally, you should seek help before you reach that point.”

Suethe agrees.

“If it’s going to take you more than two years to pay down at least one of your outstanding debts, you might need to look into other options such as getting debt relief help from a professional,” he advises.

DIY Debt Relief

It’s possible to manage a debt problem yourself with the right methods and discipline. If your debt is not yet out of control, you can accelerate repayment with a debt snowball. That means putting extra money toward paying off your smallest balance while continuing to make the minimum payment on all other accounts. 

Once that balance is gone, you’ll be able to pay more toward your next-smallest until it’s repaid, and so on. A similar approach is the debt avalanche, in which you tackle the debt with the highest interest rate, then the next-highest, and so on. 

Accelerating debt repayment may not work if you can’t even make your minimum payments. In that case, you can attempt to settle with your creditors. Settling your debt means getting your unsecured creditors to accept less than the full amount owed. Your creditors may be willing to settle if they believe you can’t afford to pay more.

Professional Debt Relief 

It’s important to know when to seek debt relief help. Consider enlisting a debt relief company, credit counseling agency, or an attorney when you feel the time is right. These resources

specialize in helping borrowers like you manage, settle, or discharge their debts. Among these approaches are debt management, debt settlement, and bankruptcy.

Debt management plan (DMP)

If you scramble to keep up with minimum payments, you could recruit a nonprofit credit counseling agency accredited by the National Foundation for Credit Counseling. Credit counseling firms also offer debt management plans, which can help you pay off debt faster. 

A debt management plan consolidates unsecured accounts into a single payment. Your counselor may also be able to lower your interest rates, according to Lyle Solomon, principal attorney with Oak View Law Group in Rocklin, California. 

Debt management has a lower impact on your credit score than debt settlement or bankruptcy options because you completely repay your creditors. However, most DMPs require you to cancel some or all of your credit cards, which can lower your credit scores in the short term. 

“A debt management plan can help you handle unsecured debts like credit cards and personal loans. Each creditor will be notified of the debt management plan. Your payments will be sent digitally to the counseling agency every month, which will then repay your creditors on your behalf. Reduced interest rates, lower monthly payments, or ‘re-aging’ in account to avoid late fees are some of the considerations that the counselor may demand from each creditor,” Solomon says.

During the duration of the debt management plan, avoid taking on any new debt commitments.

“Also, try and make your payments on time. Creditors have made significant adjustments to you, and they want you to adhere to their conditions. After one missed payment, they might stop waiving fees and stop charging lower interest rates,” cautions Solomon.

Debt settlement

Also called a “debt relief program,” debt settlement is among the most effective means to reduce outstanding debt and eliminate bills from creditors. Debt settlement involves a creditor agreeing to less than the entire amount owed as full payment. 

If you have several late or missed payments or accounts in collection, debt relief help via settlement can be a worthy option. Here, an expert can work on persuading creditors to lower the full amount owed.

“A professional is going to be able to get you connected to resources you might not be able to find on your own. This person can also provide a clear picture of what getting out of debt can look like for you,” Seuthe notes. “The downside is that a professional will typically require the thing you don’t have enough of – money.”

Indeed, debt relief professionals charge for their services, usually 15% to 25% of the debt they successfully settle for you.  a percentage of your total debts they resolve for you. No reputable debt settlement company will charge you until you agree to a settlement and your debt is cleared. 

Despite the price, Anthony Martin, CEO of Choice Mutual, says that working with a professional debt agency can give you an upper hand. 

However, before committing to work with any debt service, make sure it is legitimate.

“Thoroughly vet any debt professional you are considering seeking for help,” Martin suggests. That means researching them online and at the Better Business Bureau.

“However, achieving a settlement can take a very long time – often between two and four years – and can be expensive,” Solomon continues. “Even if you are victorious in debt settlement, the process can take years, and you may find that there are tax implications – you may owe taxes on any forgiven amount. You’ll also have to pay fees if you employ a debt settlement company.”

He adds that debt settlement is only effective if your creditor(s) believe you will cease paying your debts entirely.

“With debt settlement, you start a savings account and make a monthly deposit. When your debt settlement company determines that your account is eligible for a lump-sum offer, it negotiates with your creditor on your behalf to accept a lower amount,” says Solomon.

Bankruptcy

Are you concerned that you owe more than you’ll ever be able to pay off? It may be time to consider bankruptcy in the form of Chapter 7 or Chapter 13, which you can pursue yourself or with the help of an attorney (which experts strongly recommend).

“Bankruptcy is a legal process by which your debts are discharged or reorganized. It may result in your wages being garnished to pay your outstanding debts, and it will deftly leave a negative impact on your credit rating,” Seuthe remarks.

When you file for a Chapter 7 bankruptcy, you may be able to erase all of your debt and get a “clean slate.” However, you’ll also lose any assets not protected by law because a judge decides what you get to keep and what you have to give up. 

Chapter 7 is not a get-out-of-jail-free card for big spenders. Solomon explains, “For example, if you misuse your credit card to buy luxury items or pay off non-dischargeable obligations, your debt might not be dischargeable.”

Only consumers whose income is too low to pay off any of their debts get to file Chapter 7. Most of those who earn more than that file Chapter 13, the “wage earner’s bankruptcy.”

A Chapter 13 bankruptcy plan requires you to repay some or all of your debts over three to five years. A bankruptcy judge decides how much your monthly payment will be, and the amount can be uncomfortably high. 

“As soon as you officially file for personal bankruptcy, your credit cards and accounts will be frozen and you will most likely be unable to qualify for any credit until you have made your repayments. Only then can the procedure of credit repair and restoration begin,” Solomon points out.

Finally, bankruptcy is public. It takes place in Bankruptcy Court and creates a public record for anyone to see, including future employers. 

Your best debt relief options depend on how bad the problem is, how comfortable you are tackling the problem yourself, your desire to keep your solution private, and how much control you’re willing to give up.