Debt Relief and Reduction – What You Need to Know
For better or worse, Americans are no strangers to debt.
The good news is, if handled responsibly, debt can be used to your advantage. Take education for example: while it’s true you’d accumulate debt in the form of student loans if you chose to achieve higher levels of education, the more education you have, the greater your chances are of finding steady employment with good pay. Just within a few years of graduating and finding steady employment, you could pay off those loans completely, plus earn more money over the course of your lifetime than you would have had you opted not to attend college.
Then, there’s the bad debt we’re more familiar with.
More Americans are in debt today than ever before. Younger generations with little knowledge of money management quickly find themselves heavy into debt, first by the reckless use of credit cards, and then caught off guard by unexpected circumstances such as unemployment, medical emergencies, or changes in the family, whether it be the death of a family member or additions to the family.
In a study conducted by the Pew Charitable Trusts, 69% of American consumers reported that debt as a necessary, but did not want it themselves, while 85% of American consumers believed other people misused debt to fund extravagant lifestyles.
According to the Federal Reserve, the average household debt is $132,529 (including mortgages), while among the 44.7 million borrowers of student loans, average student loan debt is $37,172. Those numbers are up 11% and 186%, respectively, from the last decade, while debt stemming from credit cards and car loans is steadily surpassing the $1 trillion mark.
How has debt in America been able to reach such staggering numbers?
While the average household income has risen 28% within the last 13 years, the cost of living has kept pace, even surpassing the increase of income by a mere 2%. This means that while people are earning more than they had 13 years ago, they’re still not making enough to cover the daily expenses, let alone the costs of eating out, movies, designer clothing, electronic devices, and yearly vacations. While those expenses seem harmless—and even worth it—at first, even the most financially stable families can find themselves blindsided with debt when all those expenses snowball into something they hadn’t prepared for.
Where to Find Credit Card Relief Programs
Fortunately, it is possible to reduce your debt or get rid of it altogether. Of course, this will take time, consistency and a great deal of logical thinking on your part, but for the best results, it’s wise to seek help from financial professionals. Together, you can negotiate lower interest rates with lenders, refinance your home(s) and come up with a budget that’s in tuned with your lifestyle.
Here are professional credit card debt relief programs:
- Credit Counseling
- Debt Management Programs
- Debt Consolidation Plans
- Debt Settlement
Read on to see more in-depth look at each of the solutions and how each one could provide some debt relief for you.
Credit counseling is a when a counseling agency works with you to look over your budget, weigh your debt-relief options and suggest which are the best debt relief programs for you, given your unique circumstances.
It's usually free
Most counseling agencies are nonprofit and offer credit counseling sessions free of charge. However, some agencies are for-profit and require you pay a fee before using their services.
Credit counselors are nationally certified by organizations like the National Foundation for Credit Counseling (NFCC) or Credit Counseling Certification, Inc. (CCCI).
Having a credit counselor work alongside you means having a fresh—not to mention trained—pair of eyes look over your finances. A credit counselor will help you evaluate your goals and resources, educate you on how to repay your debts as well as how manage your money more efficiently.
Any reputable credit counseling firm will tell you up front that there is no quick-fix when it comes to getting control over your debt. Yet, some may try sell you on the promise of an easy, quick solution. Others may ask you for “voluntary contributions,” in addition to the maximum amount of money allowed by the state that they can charge for their services. Look up their credentials and see if there are any online reviews about their company. Also, ask friends and relative about any counseling services they may have used.
Debt Management Plan
An option often recommended by credit counselors, the Debt Management Plan, or DMP, still obligates you to pay back the full principal. However, instead of going it alone, both you and a debt management company work with creditors to come up with a plan that eliminates your unsecured debt–student loans, credit card debt, medical bills, or any debt not backed by collateral–by reducing interest rates and fees, and determining a realistic amount you’ll pay back each month, with the expectation that you’ll eventually pay off all your debt overtime.
It’s more structured
With the Debt Management Plan, all your debt is consolidated, allowing you to make one monthly payment to the company that runs the DMP, instead of multiple creditors, making it easier to pay all creditors the right amount on time.
It puts you in good financial standing
Once you start making payments towards your debt, your credit score will increase. The higher your credit score, the more you appear financially trustworthy. This in turn makes it more likely for you to get lower interest rates on loans, easier approval for renting apartments and higher limits for how much banks will loan you.
It teaches you how to manage your finances
As you work with your credit counselor to repair your financial history and come up a feasible budget to keep you on track, you’ll learn the importance of managing your money wisely and avoid falling back into debt.
It’s time consuming
Three to five years may pass before you’ve successfully paid off all debt under the Debt Management Plan.
Expect enrollment and maintenance fees. Factor in the number of years you could be in the program, and the overall price could be hefty. Also, a consumer can call and negotiate with creditors directly, thus eliminating the monthly fee associated with the DMP.
Once you start, you’re pretty much locked in
Should you choose to leave the program, you risk losing the concessions made by your creditors. As a result, the interest rate on your debt will go up and there could be late fee payment.
Debt consolidation involves combining all your unsecured debt into a single debt and then taking out a loan to pay off that debt in fixed, monthly payments. Not only does this reduce the interest rates you were paying on each of those debts separately, but it also ensures every creditor is getting what they’re owed. If you’re unsure which debt consolidation loan is best for you, certified debt consolidation professionals can help you negotiate with lenders and find the most affordable monthly payment option for you.
Competitive interest rates
Between banks and credit unions, you might be able to shop around for low interest rates. If you’re able to find a zero-percent balance transfer credit card, that’s even better; a zero-percent balance transfer credit card is an excellent way to pay off your debt without having to worry about added interest.
Consolidation makes repaying debt easier
Not only can you get your interest rates and monthly payments, you can also rest easy knowing you’re not forgetting to pay off any of your debts.
You may not qualify
Lenders typically want to see you have a fairly high credit score before they give you loan. After all, they want to be sure that you’ll able be able to pay back their loan. This can be tough if your credit score has taken a hit from all the debt you’ve accumulated over time.
Although that zero-percent balance transfer card may seem like the most appealing option, be sure to read the fine print. Some have balance transfer fees and annual fees that aren’t worth the hassle or shorter 0% intro APR periods than you need (the longer the APR period, the more time you have to pay off debt interest-free).
You risk losing personal assets
Remember, a debt consolidation loan is still a loan, and if you’re not careful, you could find yourself at risk of losing personal assets (home, car, etc.) if you’re unable to pay off the loan.
Overall longer repayment
Although debt consolidation enables you to pay in monthly increments you can afford, this is made possible by lengthening your repayment period. You’ll end up taking longer to pay off your debt than if you decided to leave your debts separate from each other.
A solution reserved for people with very poor credit, debt settlement occurs when a creditor agrees to accept a lump-sum payment that’s less than full balance of debt owed. Because creditors usually don’t settle for any amount less than the full amount unless they believe there’s a chance they will never receive full payment, a debt settlement company will advise you to stop making payments to your creditors. Instead, you’ll make your monthly payments to the debt settlement company, and they’ll save up that money until it reaches a certain amount over the course of a few months before contacting your creditors. By then, your creditors, believing that this is the only chance they’ll have of recovering any more money from you, will be more willing negotiate with the debt settlement company on a lesser amount.
You pay less
You’ll end up paying 60-80% of your debt, but in some cases, creditors may even settle for a payment of 50% of what you originally owed. For example, a creditor might agree to accept $3000 instead of the $5000 that’s actually owed. The creditor then will update the status of your debt to “settled” on your credit report.
The overall cost may not be worthwhile
Debt settlement companies charge a fee for their services, either percentage of the debt solved or amount saved. When you do the math, the fee charged plus the debt settled often adds up to 80-90% of what was originally owed.
Your credit score will suffer
While a “settled” looks better than an “unpaid” on your credit report, it’s not nearly as good as a “paid in full.” Your credit score will most definitely take a hit for as long as seven years or until you’re able to fill in your report with more recent positive credit history. Until then, you’ll find it harder to take out loans, be approved for credit cards and loans. You may even have difficulty getting a new job!
If your financial situation has become so dire there’s no other option, bankruptcy is the last resort. Bankruptcy offers a sort of fresh start, though it’s not without its own restrictions. You have two options: you can either file for Chapter 13 bankruptcy, which works to eliminate your debts within three to five years, or you can file for Chapter 7 bankruptcy, which cancels your debts altogether.
You can start from scratch
Successfully filing for bankruptcy means wiping out all or most of your debt, starting over, and hopefully learning from your past mistakes to avoid getting into debt the second time around.
Freedom from creditors
After filing for bankruptcy, the court will issue an “automatic stay,’’ meaning that creditors won’t be allowed to contact you via phone or letters in attempt to collect on your debts. Instead, creditors will have to deal with your lawyers, not you.
You won’t lose all your assets
Any assets that are exempt in full stay in your possession. As far as what would be considered exempt, can largely depend on which state you’re in when you file for bankruptcy.
Negative impact on your credit report
A bankruptcy filing remains on your credit report for seven years, and during those seven years, any lender viewing your report will see at one point you weren’t able to pay of your debt. Not only does this make it difficult to take out loans, any loans are approved for are bound to have very high interest rates.
You don’t get to decide which assets to keep
Under a Chapter 7 bankruptcy filing, any assets not exempt from liquidation gets sold, and the profit made from the sale gets divided up among the creditors. Under a Chapter 13 filing, you may be able to keep an asset as long as you make payments to a trustee who then pays the creditors. However, this only works if the payments made to the creditors are almost as large as they would have been had the asset had been sold.
Attorneys who specialize in bankruptcy don’t work for free, and they’re hardly cheap. Then comes the court filing fees, paralegal fees, bankruptcy trustee fees, photocopying charges and consumer counseling fees.
Not all debt gets cleared away
Some debts like alimony, child support, student loans and back taxes owed to the government are here to stay until you pay them off in full.
How to Reduce Debt on Your Own
If you think you can get yourself out of debt just like you got yourself into debt, you’re not wrong. Digging yourself out of debt can spare you the headache of having to find legitimate debt relief programs (and all the costs that come with using professionals), but to be successful, you’ll have to keep track of your finances and become more self-disciplined when it comes to staying within a budget.
Tracking Your Spending
Do you know where all your money goes? Some of it goes to groceries, car insurance, rent, and every day essentials, but do you know where the rest of it goes? Knowing where every penny is spent is the first—and most important—step to conquering your debt.
It’s free because you’re working on your own case, there’s no service charges associated with attorneys or financial professionals.
It makes budgeting easier
You’ll be surprised where your money goes. Suddenly, things that used to seem important look trivial, and you’ll be able to eliminate, or at least cut down, all those unnecessary expenses.
Pouring your spending history and recording all your most recently purchases requires you to be thorough. This can be tiresome, and even downright frustrating.
It’s easy to lose track
To err is human. So is to forget. Will you be able to remember to record all your purchases, even the little ones that you make without a second thought?
Use Budgeting Software
Did you know there are tools you can use to help you monitor your spending? Yeah, budgeting isn’t just for businesses.
It’s easier than trying to keep track in your head
With budgeting software, you can monitor your spending habits and see how much money is deducted from your balance every time you make a purchase. There’s software that’s even compatible for smartphones that can keep track in real-time for when you’re on-the-go.
While people are perfectly capable of doing the math themselves, calculators ensure that numbers add up every time.
Some budgeting software and apps aren’t easily understandable to the everyday citizen; they’re more geared to those who are already familiar with finance and money management. Make sure you’re using one that you can understand or at least learn how to use with little downtime.
Refinancing Your Mortgage
To refinance your mortgage is to pay off the existing loan on your home so you can replace it with another loan with a lower interest rate. If you owe more than the home is worth, or the mortgage rates are especially low, this is a great debt-relief option. By doing this yourself, you can save money you’d otherwise have to spend hiring a professional.
Raises the value of your home
Getting a loan with a reduced interest rate can also serve to raise the rate of equity building up in your home.
You may get a new loan with a shorter term
The new loan may require you to pay the same amount as before, but for a much shorter term, saving you money in the long run.
Can use your home as leverage to pay off debt
If you go with cash-out refinancing, you can take out money on your home to pay off credit card debt.
You risk losing your home
When you use your home as collateral, your unsecured debt becomes secured debt, meaning if you miss mortgage payments, your home can go into foreclosure.
You’ll have to go through all your paperwork
Applying for a refinance loan requires an in-depth look at your finances and employment history. You’ll also have to show numerous documents, including pay stubs, recent tax returns, savings and checking account information, and investment records. Do you have all those on hand? If not, prepare to do some major digging.
Renegotiate Your Credit Card Bill
Did you know you can negotiate with your credit card companies? Yes, it’s true. They will work with you to lower your interest rates and might even compromise on a lump-sum payment. Why? Because getting some money back is better than getting no money back.
It’s not all that hard to do—all you do is pick up the phone and give them a call—but you do have to know what you’re asking for, so research your options beforehand. Otherwise, you could end up more frustrated than before you called. Remember, they don’t really want to negotiate with you, but if it means getting back as much money as they can, they just might.
More realistic monthly payments
If you can manage to get you Annual Percentage Rate (APR) lowered, your monthly payment will be more affordable. If you manage to get them to agree on a lump-sum payment, just like with the debt settlement option, you’ll pay back less than full amount. Unlike the debt settlement option, there’s no company to play middle-man, and you’ll be paying the credit card company directly.
They won’t negotiate
If they won’t budge on the interest rate or even consider a lump-sum payment, you might consider transferring your balance to another card, one that will allow you to continue paying off your debt interest-free for a certain period of time.