Guest Shannon McLay, CEO of The Financial Gym
If you’re currently feeling overwhelmed by your financial situation, you may be a great candidate for debt relief. In this article, we’ll cover what debt relief means and whether a debt settlement of this type could make sense for you.
What Does Debt Relief Mean?
Debt relief describes a contract between a creditor and an obligated party in which a partial or complete cancellation of the debt is negotiated to avoid bankruptcy. Outstanding debts can possibly be reduced to a certain percentage. In other cases, interest rates and monthly payments may be reduced, or the timeframe to repay may be extended.
In general, debt relief is only available for non-housing debts such as auto loans, credit cards, or personal loans – and debt settlement programs are only accepted if complete default of the debtor is the only alternative.
While this type of debt relief is well known, many people are unaware that it could be a way for individuals to avoid bankruptcy as well.
How Does Debt Relief Work?
If you’re struggling with debt, in most cases you don’t have to wait long to be approached by a debt settlement company like National Debt Relief. They negotiate on behalf of the debtor with the creditors and debt collectors. Usually, a certain sum is agreed upon, the debtor can pay in a lump sum, or with installment payments.
Afterwards, the monthly payments are reduced, so no further defaults will occur. Sometimes, there’s a degree of credit counseling involved to ensure that the obligated party can follow the renegotiated terms of the contract. If a debt relief comes about, the debt settlement companies will collect fees for their service.
What to Consider Before Applying for Debt Relief
To apply for a debt settlement, you’ll have to meet certain conditions. First, consider whether debt relief makes sense for you in the long term or if you’ll run the risk of taking on new debts afterward. Before considering debt relief as an option, one or more of the following statements should apply to you:
- You have credit card debt or are behind on other loan payments.
- You’ve already dealt with your debt independently and tried to get your finances in order.
- You’ve maxed out your credit cards.
- Your debt doesn’t include non-loan-related bills.
- If debt relief is unavailable, you would have to file for bankruptcy.
- You’re ready to take a long-term approach to pay off your debt.
Why is Debt Consolidation Better than Debt Relief?
Since the interest rates of personal loans can sometimes be lower than those of credit card debts, consolidating your debt into one loan could help you save a significant amount of money over time. With debt consolidation, you could pay fewer fees than that of debt settlement companies – and possibly even improve your credit score.
By consolidating several loans into a more affordable personal loan, you could also make the creditors happy and unburden yourself from your debt. Keeping only one fixed monthly payment and one credit card could simplify your financial situation dramatically as well.
Debt Relief: Not Always Quite as Easy as it Sounds
There are several ways to manage your debt, and it might not be necessary to apply for a debt settlement. Before seeking it out as an option, try to organize your debts and consolidate them into as few loans as possible while minimizing your expenses until you regain the upper hand over your finances.
Need a little help on your way towards your brighter financial future? Browse our resources section to learn more about Managing Debt!