Everything You Need to Know About Debt Relief
12 MIN READ
Published March 23, 2023 | Updated November 10, 2023
If you are one of the many Americans incurring increasing financial burdens in the form of housing costs, federal student loans, credit card debt, personal loans, auto loans or other unsecured or secured debts, keep reading.
In this article, you’ll learn about the many debt relief options available to help you get back in control of your financial obligations.
Rising inflation, housing costs, credit card debt and auto loans are just a few of the financial burdens contributing to economic insecurity. The economic dislocation will push more people deeper into debt.
You are not alone if you feel overwhelmed. With the changing economic climate after the pandemic, millions of Americans across the country are being affected by the rising cost of living.
- Household debt in 2022 has risen to over $16 trillion. That is $2.75 trillion more than in 2019.
- Credit card balances increased to $986 billion, the highest-ever quarterly growth on record.
- Mortgage balances rose to over $11 trillion, a $1 trillion increase in 2022.
- In 2022, over 18 million people were behind on their credit card payments.
Credit card balances are higher, rates are up and an increasing number of people are carrying credit card debt.
If you are feeling overwhelmed with debt, please know that there are options available to help you get back in control of your finances. Seeking debt relief programs is one of the most effective ways to help you regain control of your life and financial obligations.
Debt relief is available in many forms. Each with its own pros and cons. Keep reading to learn more about how debt relief works and how TurboDebt can help you determine the best option for your individual circumstances.
What is Debt Relief?
Debt relief refers to strategies that are used to make debt easier to manage. The type of debt resolution program that is suitable for you will depend on the form of debt you currently have, your eligibility, and the kind of help you are looking for.
While there are several different types of debt relief programs, their goal is always to help you find a path toward a debt-free life.
Once you realize that you need help managing your existing debts, the next step is to choose a debt relief option that works for you.
Debt relief programs can help you in several ways, such as:
- Loan refinancing - A new loan with more favorable terms.
- Debt consolidation - Rolling multiple debts into a single payment.
- Reductions in interest rates - Negotiating interest rates.
- Negotiating for a reduction in the principal amount of debt, or repayment terms - Lowering the amount owed and/or the monthly payment.
- Shorter time to become debt free.
When to Look for Debt Relief
Can’t manage your debt payments? This is the right time to look for debt relief.
There are a number of different options available for borrowers. To look for the one most suitable for your situation, consider your current personal circumstances.
Generally, debt relief is right for you when:
- You can’t manage your current debt.
- You are struggling to make payments on your debts.
- You are behind on your credit card bills.
- You are behind on your student loan payments.
Debt relief programs require commitment on your part. It is essential that you look into the habits that are currently keeping you in debt and avoid creating new debt while you are working on paying off your existing bills.
It is important to know that there are two types of debt:
- Secured debt is debt that is tied to an asset such as your home or your car. In case of missed payments, creditors can seize the asset.
- Unsecured debt is debt not tied to an asset and thus typically carries higher interest rates. Examples of unsecured debt include credit cards, medical bills and personal loans.
Credit Card Debt
Credit card debt is currently the second largest source of debt after mortgage debt. If you have mounting unsecured debt, you may want to consider a credit card debt relief program or a similar option.
To qualify, you have to meet certain requirements:
- Higher credit scores to qualify for a new low-APR consolidation loan or a credit card.
- Higher debt amounts to be eligible for certain debt relief programs.
- An income review to determine if you are eligible for these programs or for a bankruptcy filing.
For every 7 in 10 Americans, reducing debt is a priority for improving well-being. If you are committed, there is a way out of debt and TurboDebt can help you determine the right option for you.
Doing-it-Yourself Debt Relief
Reducing your debt balance and interest rate requires discipline and planning. You’ll need to create a detailed plan to reduce your debt, negotiate with your creditors and stick to the payment plan to do it successfully.
DIY debt relief may not be for everyone, but you can start by contacting your creditors and explaining your circumstances. Many credit card companies offer hardship programs and are often willing to waive fees and lower interest rates.
You can also negotiate a debt settlement with your creditors and make a lump sum payment. However, the process can be stressful and complex. It's much easier and less stressful to work with a reputable debt relief company that understands the process of how to negotiate with creditors.
You may also consider conventional strategies to pay off debt. If your credit scores are still good, you may be eligible for a debt consolidation loan with lower interest rates. You can also apply for a 0% balance transfer credit card.
If you decide to go with DIY debt relief, it is crucial to have a plan in place to prevent you from getting into debt again. If you have missed payments in the past or are in considerable debt, it may also be hard to qualify for a consolidation loan or a new credit card.
How Your Credit Score is Affected by Debt Relief
Debt relief can impact your credit scores, depending on what your score was to begin with, and the debt relief option you choose. For example, your credit scores may already be affected if you are already behind on monthly payments, your utilization rate is maxed out, and choose to go for debt settlement.
Debt management plans and credit counseling typically have no or minimal impact on your credit. It may also help you improve your credit if you can reduce your debts and make timely payments once you have created a new repayment plan.
It is important to research and read the terms and conditions before you opt for any credit card debt relief program or loan. Make sure to monitor your credit scores regularly to keep track of any changes.
How Much Does It Cost to Get Debt Relief?
Typically, debt settlement companies charge 15% to 25% of the debt they settle as fees. The fee is calculated on the enrolled debt, which is the amount of debt that you have when you enroll in the program. This fee cannot be charged until you have settled your debt.
Debt settlement can help you save $2.64 for every $1 you pay in fees, according to the American Fair Credit Council. Upon completion, you may see savings of 30% on your original debt, including fees. In many cases, you may also be able to save up to 50% on your original debt before fees.
There may also be tax costs associated with debt settlement. Generally, forgiven debt is considered to be taxable income by the IRS. However, if you can demonstrate that you are insolvent, you may not have to pay the required taxes. The IRS will typically consider you insolvent when your total liabilities are more than your total assets.
When it comes to credit counseling, services are very affordable and can range from $25-$50 for monthly monitoring. If you want to get a more detailed overview of your finances, you can also work with a counselor for $75+/hour. With a more in depth review of your finances, and the help of a credit counselor, you may be able to reduce your interest rates to about 9% on average.
Beware of Debt Relief Scams
Whether you are interested in debt management plans, credit counseling, or other debt relief programs, it is important to ensure that the company you choose to work with is legitimate to avoid being a victim of a scam.
Start by checking the Consumer Financial Protection Bureau to see if there are any complaints registered against a debt relief company. Then, verify the reputation and reviews of the company at the Better Business Bureau.
Be aware of red flags, such as companies demanding fees before the services are offered, lack of transparency and requests for access to your personal information.
Before you enter into any agreement, ensure that you understand the fees that you will need to pay, the tax implications and how the creditors that are being paid.
Debt Relief Programs to Get You Out of Debt
There is no one-size-fits-all debt relief program. Depending on what you currently owe, the type of debts you have, and interest rates, there are many available debt relief programs.
Here is a closer look at some of the most common options available.
Debt consolidation involves combining several different debts into one. This can be done through a debt consolidation loan or balance transfer credit cards. With debt consolidation, you will only be making one debt payment each month.
A debt consolidation company can help you combine all your debts into a single loan at a lower interest rate. This means that you will be saving a considerable amount of money as you pay off your debts. Repayments are easy and straightforward because you will only be dealing with one payment each month.
Debt settlement is another effective solution if you're facing overwhelming debt. With this option, you may be able to settle your total debt for less than what you currently owe.
Working with a debt settlement company can simplify the process as you allow experts to negotiate on your behalf instead of trying to make a deal with your creditors on your own. Debt settlement may negatively impact your credit score for a time while you wait to pay off the debt in a lump sum once you reach a settlement.
Debt Management Plans
While debt management can include several different strategies for addressing debt, the most effective debt management plans will allow you to enroll debts into a program and make a single payment towards the plan each month. The payment you make will then be distributed among your different creditors. With this type of plan, you do not have to open a new balance transfer credit card or take out personal loans. You may also be able to have fees waived or receive lower interest rates.
If you need help coming up with a feasible debt repayment plan, seeking credit counseling can be a good fit. Many nonprofit and for-profit credit counseling agencies have credit counselors who can discuss your finances, current circumstances, debt and budget. They can review your debt and spending to help you create an individualized plan and payment schedule.
Bankruptcy is the last resort option for dealing with debt. Chapter 7 bankruptcy is means based and requires you to be in extreme financial distress. If you qualify, this can be an excellent option to remove most of your outstanding debt, such as medical debt and credit cards. However, it cannot provide student loan debt relief or eliminate back taxes.
On the other hand, Chapter 13 bankruptcy is much easier to qualify for compared to Chapter 7, making it the more common type of bankruptcy. And referred to as wage earners bankruptcy, in a Chapter 13, all or most of a person's debts are paid back over the course of a 3-5 year payment plan based on what the individual can afford.
If you're thinking about filing for Chapter 13 bankruptcy, you should be aware of the following potential drawbacks:
- You will usually have to pay any legal cost upfront. (Around $3,000)
- The bankruptcy is on your credit for 7-10 years and on your public record permanently
- You must commit all of your disposable income to your creditors.
Bankruptcy is a legal process that requires a few months to complete, and it's always wise to speak with a bankruptcy attorney to determine if it's the right option for you. While bankruptcy can have a major impact on your credit report, it may be the best available solution in certain cases.
Debt forgiveness programs are not common. When available, this option can help you significantly lower or erase certain debts. You will need to meet certain qualifications to be eligible for debt forgiveness programs.
Based on your individual circumstances, you may be eligible for debt forgiveness programs that allow partial or complete cancellation of debt.
Debt Relief Companies to Consider
If you are overwhelmed with debt, these companies can provide you with the information you need to come up with a workable solution to pay your bills.
Debt relief companies can help you settle your debt, lower your interest rates and help you come up with a repayment plan for your debts.
While there are several debt relief companies offering their services, it is important to ensure that the company has professional counselors that are trained and have the required certifications. Professional credit counselors can provide credit reports and budget reviews. They can also help you with bankruptcy and enrollment into debt management plans.
Now you know that there are many types of debt relief plans available. The next step is to connect with an accredited debt relief company to discuss your unique circumstances and come up with a customized repayment plan.
TurboDebt offers counseling, consultation, and planning services to help you create a feasible debt relief and repayment plan. We provide multiple debt management options so you can achieve your financial goals.
Connect with our knowledgeable debt relief professionals for a free consultation today. Here’s what our satisfied clients are saying about our debt relief services.