Debt relief takes several forms, including debt consolidation, debt management, debt settlements, and bankruptcy. All of these approaches aim to alleviate financial burdens and ideally become debt-free. One approach may be more suitable for your situation than another, so it is important to carefully weigh your debt relief options.
When is it a good idea to seek debt relief?
It’s a good idea to seek debt relief if you are having difficulty managing your finances, or if you are failing to keep up with payments on credit card bills and other debts. Signs that may indicate you need to seek debt relief include:
- You are being harassed by creditors or collection agencies about overdue payments.
- You continuously rely on savings to cover debt payments.
- You are regularly denied loans and credit cards.
- You are taking on extra work to pay your bills.
- You face a debt-to-income (DTI) ratio exceeding 43%. To calculate your DTI ratio, divide your monthly debt payments by your gross monthly income.
Note: Individuals with significant debt are often targets for debt settlement scams. In some cases, scammers may ask for upfront fees but provide no actual assistance. Experts recommend not paying upfront fees to debt settlement companies.
Types of debt relief
Debt consolidation
Debt consolidation involves merging multiple debts, such as credit card bills or personal loan payments, into a single monthly payment. Your options for debt consolidation include a balance transfer card, a debt consolidation loan, or a home equity loan.
Debt management
A credit counseling agency can help you set up a debt management plan.
Debt settlement
Debt settlement companies, also known as debt relief companies, renegotiate debts owed to creditors or debt collectors. However, the Consumer Financial Protection Bureau warns that working with a debt settlement company can be risky. For example, once your credit report shows that you are settling some of your debts, your credit score may drop by 100 to 125 points.
Bankruptcy
If a consumer with a heavy debt burden files for bankruptcy, they usually file for Chapter 7 or Chapter 13 bankruptcy. It is a legal maneuver aimed at helping the indebted person start over. Chapter 7 bankruptcy typically wipes out most of your debts, while Chapter 13 bankruptcy establishes a court-approved repayment plan.
What you need to seek debt relief
What you need to seek debt relief varies depending on the type of debt relief you choose. Generally, you will need to:
- Gather financial documents, such as credit card statements, loan statements, and bank statements.
- Know how much debt you have.
- Review the interest rates on your debts.
- Determine which debt relief option will be best for you. Are your finances stable enough to manage the debt? Or is filing for bankruptcy as a last resort the better alternative?
- Research the option you have chosen for debt relief. For example, what are the eligibility requirements for any credit counseling agencies you are considering?
Choosing a debt relief program and applying for debt relief
As you decide on a debt relief program, be sure to consider:
- Fees: This is particularly important if you are using the services of a debt settlement company, as their fees can be particularly high.
- Company reputation: Has the program been around for a long time? What do online reviewers say about it? Is it in good standing with the Better Business Bureau?
- Customer service: Has customer service received a lot of praise or complaints?
- Documentation
Required: For example, if you file for bankruptcy, the court usually wants to see documents such as income tax returns, proof of income, credit card statements, loan statements, bank statements, and retirement account statements.
Note: Be aware that if you are dealing with a debt settlement company, fees may range from 15% to 25% of the total debts that were agreed to be settled. Debt settlement fees may exceed $300
Source: https://www.thebalancemoney.com/how-to-get-debt-relief-7508754
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