Debt Relief Programs Compared
Debt relief comes in many forms, depending on you and your budget. Understanding the pros and cons of each professional option helps you make an informed decision.
Debt relief is a necessary financial tool for many Americans. The latest available data from the Federal Reserve shows the average U.S. household is $6,400 in credit card debt. That’s just the average. Many have a much higher balance and struggle to manage their credit card bills.
A recent survey by Newsweek shows that 68% of Americans have credit card debt – making it more common than all other forms of debt, including auto loans, medical debt, mortgages, personal loans, and student loans.
Recently released data from the Philadelphia Federal Reserve shows the percentage of Americans who can only afford to make minimum payments has jumped to 10.75%, the highest on record since 2012.
Professional debt relief methods help solve debt problems when minimum payments aren’t making a dent. These are the solutions you use when you can’t afford to make your monthly payments or when your monthly payments aren’t effective at eliminating a debt.
There are many types of debt relief for many types of debt. Let’s start with credit card debt relief options, and then we’ll cover all debt relief below.
Credit card debt relief options
Debt consolidation
Debt consolidation takes multiple debts and rolls them into a single monthly payment at the lowest interest rate possible. There are several ways to do this. Debt consolidation loans take out a new loan to pay off your debts. Debt consolidation programs are repayment plans you set up through a debt relief service. You can consolidate multiple balances using a debt management program (DMP) for credit card debt.
A debt management program is a structured form of repayment offered by nonprofit credit counseling agencies. A certified credit counselor will negotiate with your creditors to reduce or potentially eliminate your interest charges so you focus repayment on the debt’s principal.
Other forms of consolidation can be done on your own by transferring balances on your credit card or combining multiple balances on one consolidation loan. These types of do-it-yourself consolidation require a good credit score for lenders to offer you a better interest rate than you’re currently paying.
Many people struggling to repay their credit card debt typically don’t have strong credit. A debt management program can be an ideal debt relief option. But, they may not earn enough income to fit a monthly DMP payment in their budget realistically.
That’s why many nonprofit credit counseling agencies offer free initial consultations. A phone call with a certified credit counselor can help determine the best option for you based on your current financial situation.
Debt settlement
Another popular debt relief option is settlement. Often, when a nonprofit credit counseling agency determines your budget is not a good fit for a debt management program, they may refer you to explore debt settlement.
With debt settlement, you get out of debt for less than the amount you owe. You pay back a percentage of your outstanding balance. Then, the creditor agrees to discharge the remaining balance owed.
You’ll need to provide a hardship statement explaining why you can’t afford to repay your full balance to your creditors.
The debt settlement company will need to negotiate with your creditors on a lump sum reduced amount. Once the two parties agree, the settlement amount will be paid, and the remaining balance will be forgiven.
Understanding the implications of enrolling in a debt settlement program upfront is important. Rather than making a monthly payment to a credit counseling agency that pays your creditors on your behalf, debt settlement requires lump sum payments.
Each debt you settle creates a negative item on your credit report that sticks around for seven years. This will decrease your credit score, but it can be a good solution for debts already in collections.
Also, the debt settlement industry has long been plagued by nefarious actors. Never enroll with a debt settlement company that requests fees paid upfront without results.
Always confirm the debt settlement company is an accredited member of a trade organization like the American Association for Debt Resolution and complies with its code of ethics. You can also search the company’s ratings with the Better Business Bureau.
Deferment/Forbearance
This type of debt relief delays or suspends the monthly payments on a specific debt for a set period of time. You call your loan servicer and tell them you can’t make your payments. They agree to either reduce your payments or suspend them entirely for a period of time. That way, you have time to get back on your feet without missing debt payments, which would negatively impact your credit.
Deferment allows you to suspend for a set period, typically without accruing additional interest charges. Forbearance is when you can reduce or suspend your payments, but the balance will continue to accrue interest. Both options really only provide temporary debt relief. You’ll still owe the money, and if you’re allowed forbearance, you may owe more money in the long run due to the interest charges.
These may be good options for someone experiencing a temporary hardship. Many Americans were furloughed from work during the COVID-19 pandemic years ago. Deferment or forbearance was helpful for those folks while waiting to get back to work.
However, the longer you struggle with credit card debt, the worse the situation can become. Consider deferment or forbearance temporarily treating your credit card debt symptoms. You’ll need a more aggressive treatment like professional debt relief.
Workout arrangement
Workout agreements are also known as hardship agreements or credit card workout arrangements. These agreements are typically offered to individuals experiencing financial hardship and can help reduce interest rates, waive fees or establish a more manageable payment plan.
With this type of credit card debt relief, you call your creditor to a plan to pay off your account. The creditor will review your financial situation. They may ask for proof of income, expenses, and outstanding debts to determine if you’re eligible for a workout agreement.
The creditor typically agrees to lower or eliminate the interest applied to your account. However, they will typically close the account, so you can not make any new charges, and the account may be closed once it is paid off. You agree to a monthly payment that you can afford that allows you to pay off the balance and catch up on any past-due amount that you owe.
A workout agreement may be a good option for someone experiencing temporary financial hardship but expecting to recover soon. They want to avoid defaulting on their credit card payments or need lower monthly payments to stay on track financially.
Remember that not all credit card issuers offer hardship programs. If you qualify for one, your account may be closed, and your future credit access may be limited. Also, some creditors may still report participation in a hardship plan to credit bureaus, which could impact your credit score.
