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Getting Out Of Debt

What is debt relief and what do I need to know?

Getting out from under significant debt can unfortunately seem like a daunting, uphill battle. Because those who carry a lot of debt can sometimes feel desperate for an escape from it, especially if it’s causing them financial hardship, many will turn to debt relief solutions that promise them a quick and easy fix. 

However, taking such measures can sometimes leave people in greater debt than when they started, so it’s important to fully assess all options when it comes to finding the best way forward to tackle debt.

Debt relief refers to partial or total cancellation of debt. Although there are some ways to take advantage of debt relief to provide a little more breathing room with your finances, it’s important to not get swept up by the promises that debt relief companies generally give.

Here’s what you need to know about debt relief, what to keep an eye out for if you’re considering it, and some alternative approaches that may provide a better option depending on your circumstances.

1. Debt relief services: best to avoid

A quick online search for debt relief will yield a number of results for debt relief or debt settlement companies. 

Usually, they promise to help you manage your debt by drastically reducing the amount owed. This can also include promises to lower your interest rate, monthly payments, or both. 

Debt relief can also mean agreeing on a settlement, which is a lump sum you’ll pay to your creditor (the company you owe money to) to settle your debts. This is usually lower than the total debt you initially owed. 

When you work with a debt relief company, they can negotiate with your creditors. But, they charge you a fee to do this, and those fees can sometimes be quite high. 

If debt relief services sound too good to be true, it’s probably because they are. The Consumer Financial Protection Bureau (CFPB) warns, “Dealing with debt settlement companies can be risky.”1

It’s fairly common for debt relief companies to be unable to settle all of your debts. You’ll still have money due—and the money you’ve paid the debt settlement company could have gone directly toward paying down your debt. 

Downsides of using debt relief services

Using a debt settlement company usually means paying them significant fees to distribute money to your creditors. And, your creditors are under no obligation to negotiate a settlement of the amount you owe. 

Debt settlement companies may focus on smaller debts first, which can result in interest and fees on larger debts increasing. Likewise, they can negatively impact your credit score by encouraging you to stop sending payments directly to your creditors, resulting in further late fees, penalties, and even debt collection.

2. Non-profit credit counselors: best for advice

A non-profit credit counselor can be a good resource for guiding you through debt management.

Although you may still have to pay a fee, nonprofits are generally focused on helping those in need without taking financial advantage of them.

These credit counselors can advise you on how to handle your debts and help you map a plan—called a debt management plan (DMP)—to get out from under them. 

If you’re interested in working with a credit counselor, the Federal Trade Commission provides some tips for selecting the right one. 

Downsides of working with a credit counselor

Having to pay some fees is the only real downside here. But, the fees are probably worth paying if you’re able to choose a reputable credit counselor that can help provide you with a clear plan to get out from under debt.

3. Debt consolidation: best if you have good credit

Debt consolidation is when you combine several current debts into a single new debt. While you still need to repay the money, debt consolidation can make paying your debts simpler because you’ll have fewer bills each month. Not to mention, you may end up paying less money overall by getting a lower interest rate.

Personal loans are commonly used for debt consolidation. These loans are often unsecured, meaning a lender will approve you based on your credit background and you don’t have to put up collateral, like your car or home. However, a home equity loan, home equity line of credit, and cash-out refi are all secured loans that use your home or assets as collateral.

Using a balance transfer credit card is another way to consolidate debt. If you have good credit, you may be able to open a balance-transfer credit card that offers 0% interest for an introductory period. But, make sure you can pay all the debt off before the 0% interest rate expires. 

There are also often fees to do a balance transfer. Additionally, the new annual percentage rate (APR) can be very high after one missed payment, and, chances are, you won’t be on a monthly fixed-payment installment plan.

Downsides of debt consolidation

You might not be accepted for a debt consolidation loan or balance transfer credit card if you have a low credit score. There are often balance transfer credit card fees, and not being able to make payments before the introductory 0% APR expires can end up costing you more in interest in the long run. Using a secured loan can also mean risking your collateral if you are unable to make timely payments in the future.

4. Proactively reducing your debt: best if you’re willing to put in the work

The truth is, tackling debt isn’t easy. But you don’t necessarily need to enlist the help of a debt relief service or credit counselor to navigate the path to becoming debt-free. By proactively working on reducing debt on your own, you can avoid the risks and fees associated with other forms of debt relief.

Start by envisioning a debt-free future where you have greater flexibility to make the choices you want without living under the cloud of debt. Then, commit to reducing your debt, even if it comes with some tough spending cutbacks—this isn’t something you can do halfway. Spend some time working on your budget to determine how much money you can realistically pay each month toward your debts.

Make a financial plan that includes your debt reduction goals. Vary your goal sizes, too—while living debt-free is the destination, what smaller milestones can you hit along the way? 

If overspending is what got you into debt in the first place, try to get to the bottom of why you felt the need to spend more than you should have in the first place. In many ways, striving to be debt-free is similar to practicing minimalism. Buy only what you need, and be very critical about the definition of “need.” 

Eventually, you may stop craving the short-term thrill of spending money and instead enjoy the feeling of relief that you are taking the necessary steps to eliminate your debt moving forward. 

Also, call your creditors. Although they are not obligated to do so, many offer hardship programs. Communicate to them that you’re having trouble paying the amount due, they may be able to work something out with you. Explain how much you can pay them each month and see what agreement you can reach. If you’re willing to put in the elbow grease, you can potentially get lowered payments or a lower interest rate.

Downsides of a DIY approach to debt

There aren’t many cons here other than the work you’ll have to put in in terms of reducing your spending and being more mindful with money management. This is also a longer term approach that doesn’t necessarily offer immediate relief from debt. Although spending cuts may be tough at first, they may eventually become good habits that protect from further debt in the future.

When it comes to debt relief, you have options for giving yourself a bit of financial breathing room and getting out from under the cloud of debt. It’s important to weigh the pros and cons of each approach, as well as do the proper due diligence before determining which is best for you. If you’re serious about reducing your debt and considering your options, you’re already on the right path forward to building a healthier financial future for yourself.

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