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Which Debt Relief Option Is Best for You?

Navigating the world of debt relief can be confusing, frustrating, and downright scary—but it’s a swamp worth wading through. Although scammers are known to prey on those who’ve fallen on hard times, there are many legitimate routes to getting on a more manageable payment plan or having your debt discharged.

There’s no one-size-fits-all solution, though. Different options work best for people in different situations, and each has its pros and cons. Our goal is to clearly explain the differences, benefits, and drawbacks to several popular debt relief programs.

Do you have unsecured or secured debt?

Your options will be determined, in part, by whether you have secured or unsecured debt.

Many debt relief programs can help with unsecured debts, such as credit card debt, medical bills, and personal loans. While creditors can sue you for past-due amounts and may be able to garnish your wages, that can be an expensive and time-consuming process. Creditors may benefit from working with you to find a more manageable arrangement.

With a secured loan, such as a mortgage or auto loan, the creditor can take your property if you fall behind on payments. That can still be difficult and expensive for creditors, which is why there are also debt relief options for secured loans. But creditors may feel less pressure to accommodate borrowers.

Secured vs. Unsecured Debts
Secured Debt Unsecured Debt
  • Includes auto loans and mortgages.
  • A creditor can take the loan’s collateral, such as a home or car, if you stop making payments.
  • Creditors may work with you directly if you can’t manage the payments.
  • Creditors are rarely willing to accept debt settlement offers or permanently lower your payments.
  • Includes credit cards, medical bills, and many personal loans.
  • A creditor can sue you for past-due balances, but can’t take your possessions.
  • Creditors may work with you directly or a third party to make your payments more manageable.
  • Creditors may be willing to accept settlement offers or alternative repayment plans.

Student loans are an outlier because they’re unsecured loans, but special rules apply. For example, it’s difficult to get student loans discharged in bankruptcy. However, there are also special repayment and assistance programs for federal student loans. You may be able to temporarily pause payments, or bring your monthly payment down to a few dollars a monthly—sometimes down to $0.

Your credit and income can also impact your options as some routes are only available if you can qualify for new loans or afford monthly payments.

Common debt relief programs and options

Debt relief can come in different forms. Sometimes, debt piles up so high that you need to wipe it away and start over. Other times, you may be able to afford a partial repayment, or you want to lower monthly payments, even if that means paying more in the long run.

Here are several popular debt relief options. You may be able to arrange some of them on your own, while others often require professional assistance.

We’re going to take a closer look at debt consolidation loans, DMPs, and debt settlement as the intermediary options that you may want to pursue when creditors don’t offer you a hardship program, and bankruptcy seems too extreme.

Debt consolidation vs. DMP vs. debt settlement

Debt Consolidation Loan Debt Management Plan Debt Settlement
Eligible Debts Secured and unsecured accounts Generally, only unsecured accounts Generally, only unsecured accounts
Credit Required Good to excellent None None
Potential Impact on Credit May improve your credit Temporary dip, but positive overall Will likely hurt your credit
Cost A potential origination fee and interest on your new loan Potential startup and monthly fees Potential startup and monthly fees for the bank account
A portion of the savings on the settled debt
Taxes on the discharged or forgiven debt
Savings Interest savings depending on your new loan’s rate Potential waived fees and interest savings Pay less than the full account balance
Timeline to Debt Freedom You can choose your new loan’s term Often three to five years Often two to four years

Debt consolidation loans

If you can qualify, a debt consolidation loan can save you money, lower your monthly payment, and consolidate multiple payments into one. Plus, you can use them for secured and unsecured loans.

Here’s how debt consolidation loans work

A debt consolidation loan describes how you’re going to use the proceeds of a loan rather than a specific type of loan. It’s a form of refinancing in which you can improve your finances by taking out a new loan with better rates and terms than your current loans.

Often, people will take out an unsecured personal loan to consolidate higher-rate loans. But you could use a home equity loan or home equity line of credit, two types of secured loans, to consolidate debt.

With a debt consolidate loan, you’ll use the money you borrow to pay off other loans. Afterward, you’ll have fewer bills to pay each month, which could make managing your finances easier. Depending on the terms of your new loan, you also may be able to save money and lower your monthly payments.

Pros of debt consolidation loans

Cons of debt consolidation loans

What to watch out for with a debt consolidation loan

Aside from qualification requirements, be careful about using a secured loan to consolidate debts—especially unsecured debts. While falling behind on credit card payments can lead to interest, fees, and collection calls, if you refinance the debt with a home equity loan, you’re putting your home at risk if you can’t afford the payments.

Also, consider your overall cost when comparing debt consolidation loans. A longer repayment period can lead to lower monthly payments, but you may wind up paying more in interest. And read the terms carefully. Sometimes, you can’t use the funds from a personal loan to pay off student loans or other types of debt.

Debt management plans

Credit counseling agencies offer debt management plans (DMPs) as a service to clients. If you sign up for a DMP, a credit counselor will act as the intermediary between you and your creditors.

Here’s how debt management plans work

You’ll generally start with a free budget and debt counseling session where you’ll speak with a credit counselor about your finances. The counselor can then assess your situation and determine if a DMP is a possibility and a good option. If you decide to go forward with a DMP, the counselor will reach out to your creditors and negotiate on your behalf.

The counselor may be able to get your creditors to fees and offer more favorable repayment terms. If you’ve fallen behind on payments and can’t afford to pay the full past-due amount, the counselor may also be able to get the creditor to “re-age” the account and bring it current. As a result, your future payments will be on-time payments that can help you build credit.

Generally, DMPs are designed to last three to five years, and all the included accounts will be repaid in full when you’re done. Your monthly payment will stay the same the entire time, and if you pay off one account, your counselor will allocate that portion of your future payments to your other debts.

Pros of debt management plans

Cons of debt management plans

What to watch out for with a debt management plan

A DMP can be a good option if you have enough income to manage the monthly payment, particularly because there’s no credit score or history requirement.

However, you’ll also be limiting your short-term financial options because you may have to close all your credit cards to get started. Sometimes, you can keep a credit card for emergencies. But your current creditors may monitor your credit reports and withdraw from the DMP if they see you’re frequently using credit or opening new cards.

Also, make sure you’re working with a reputable organization. One option is to find an agency through the National Foundation for Credit Counseling (NFCC). All member agencies are nonprofits that are accredited by a third-party organization, and member agencies’ counselors must receive and maintain certifications. They’ll all also offer you an initial debt and budget session with a counselor for free.

You could also limit your search to agencies that have a relationship with a major government agency, such as HUD-approved or Department of Justice-approved credit counseling agencies.

There are for-profit credit counselors and services that sound similar to credit counseling and DMPs but aren’t. If something sounds too good to be true, or you’re being given a hard sales pitch rather than non-judgemental advice, you may want to keep looking.

Debt settlement

Settling your debt is when you pay less than the full amount you owe, and the creditor forgives the remainder of your debt. If you’re already behind on unsecured debt payments, debt settlement (sometimes called debt relief) could save you money.

Here’s how debt settlement works

If you’ve fallen behind on payments, creditors know there’s a chance you may never pay off the account. Once you’re far enough behind, creditors may sell your debt to a collection agency for a few cents on the dollar. For example, a collection agency may buy your $2,000 past-due credit card debt for $50, and then try to collect the money from you.

Rather than selling your debt or paying for an attorney to sue you, creditors may accept a settlement offer. If you could pay them $1,000 of the $2,000 you owe, they’ll still make more than they could from a collection agency. Similarly, if the agency already bought that debt for $50, it will make money if you settle the account for less than the full balance.

You can try to settle your own debts with your creditors. Or, you can hire a debt settlement company. In either case, you’ll stop paying your credit card bills—after all, the company won’t accept a settlement offer if it believes you’ll pay in full.

If you’re working with a debt settlement company, you’ll usually transfers money to a third-party bank escrow account each month. There may be a setup and maintenance fee for the escrow account.

Once the settlement company feels you have enough money in escrow to settle an account, it will reach out to your creditors and make a settlement offer. If the creditor agrees, you can settle the account for less than the full balance. The settlement company will usually charge you a fee based on how much money you saved by settling the debt.

Pros of debt settlement

Cons of debt settlement

What to watch out for with debt settlement

Debt settlement experts and attorneys frequently deal with creditors and may know how much to offer, when to make the offer, and which creditors you shouldn’t bother sending settlement offers to. These professionals may be able to save you money, even after you pay their fee.

However, continuing to let bills go unpaid can hurt your credit, lead to additional fees and interest, and spur a creditor to sue you and garnish your wages (especially if you owe the creditor a lot of money). You also need to watch out for unscrupulous debt settlement companies that take your money and never work with your creditors to settle your accounts.

You can look for reviews of companies online and steer clear of companies that promise they can get creditors to agree to a settlement offer. Although there may be initial and monthly fees for the escrow account, debt settlement companies also can’t charge you an upfront fee for debt settlement services—that’s a red flag.

Finally, know that any forgiven debt could be considered taxable income for the year. Say your credit card company accepts $3,000 on an account with a $5,000 balance. Regardless of the fees you paid to the settlement company, you may need to pay income taxes on the $2,000 of discharged debt.

What’s best for you?

Figuring out which debt relief option will work best can require a close analysis of your finances, credits, and goals.

For example, a DMP might cost you more than filing Chapter 13 bankruptcy or debt settlement, but it’s also likely a better option if you’re concerned about your credit in the short-term. Conversely, a Chapter 7 bankruptcy might be terrible for your credit, but it can wipe away debts and offer you a fresh start.

If you’re looking for unbiased assistance, Credit Squad members can reach a US-based credit representative. We will help examine your credit history and finances and explain why different debt relief options may make more or less sense for someone in your situation.

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