While there are multiple kinds of debt relief, they all aim to either reduce the amount of your debt or to modify your terms. Whatever the case, there is no shortage of debt relief programs. After all, such programs can help you pay off your overwhelming unsecured debt—and give you a fresh start.
However, you do want an effective program that will meet your needs and accomplish your goals. To that end, here are key elements of the best debt relief programs.
What Is Debt Relief?
A debt relief program can help you manage debt by changing your payment schedule or interest rate. Debt relief could also refer to filing bankruptcy to get rid of your debt altogether. Commonly, though, the term means negotiating with creditors to settle the obligation for a reduced amount. This kind of debt relief is also called debt settlement.
Who Uses Debt Relief?
Prime candidates generally include those who don’t think they can pay off their unsecured debt—credit cards, certain student loans, and personal loans, for example—within five years, even with extreme belt-tightening. Those whose unsecured debt is equal to at least half their gross income also often seek debt relief. Overall, debt relief works best for those who can barely make the minimum payments on their credit cards or other unsecured debt, further increasing the overall debt.
How Does Debt Relief Work?
With debt settlement, offered by companies such as SmartSpending, you enroll in a program that calls for you to stop making monthly payments to creditors. Instead, you put money into a federally insured savings account in your name that you control.
As you build up your funds, the debt relief company will reach out to your creditors to negotiate lower balances on your behalf. These creditors—typically credit card issuers—often agree to the new terms because, well, something is better than nothing.
Then, the debt relief company will use the funds in your special savings account to pay your creditors the negotiated amounts. Typically, you’ll be in the program for 24 to 48 months, depending upon how quickly you accumulate settlement savings.
Are Debt Relief Programs Good?
They can be very good—if you choose an established, accredited, reputable company. In fact, with SmartSpending, you can save up to 46 percent of your debt. You can use the extra money to pay other bills, purchase a home, or prepare for your retirement.
For that, you’ll be charged around 25 percent of the amount of your enrolled debt, but only after the company has successfully reduced your debt load.
Not only might you be able to settle for less than what you owe, but debt relief can allow you to repay your debt sooner and avoid bankruptcy. Note, though, that because you must stop paying your creditors, enrollment in a debt settlement program can damage your credit.
Elements of the Best Debt Relief Programs
The best debt relief programs share certain elements that set them apart from less effective and even unscrupulous companies.
But before you settle on a debt settlement program, you must first conduct a clear-eyed assessment of your financial situation.
Take the time to determine:
- The amount of debt you’re carrying, and how much of it is unsecured debt (no collateral involved)
- Whether you are experiencing a hardship, such as a health issue or employment loss, that prevents you from decreasing your debt.
If you decide that debt settlement is right for you, take these steps:
- Research the company’s reputation. Seek out companies that have favorable customer reviews and a record of successfully negotiating for clients. Check for ratings on sites such as the Better Business Bureau, and also look for online testimonials.
- Make sure the company is accredited. Accredited agencies adhere to best practices and ethical standards and are in good standing with organizations such as the International Association of Professional Debt Arbitrators and the American Association for Debt Resolution.
- Be certain the company follows Federal Trade Commission rules. Companies are prohibited from asking for upfront fees before working to settle your debt.
- Make sure you understand the fees involved. You want to know whether the company charges a percentage of the total debt enrolled or the savings, as that affects your settlement savings.
- Check the settlement process and timeline. Ask how long the program typically takes and whether a lump-sum payment or monthly contributions are required. Find out how and when the agency begins negotiations with your credit card issuers or other creditors.
- Make sure the company is transparent. Seek a company that provides progress updates, has a support team with whom you can discuss questions and concerns, and fully informs you of the risks, the process, and expected outcomes.
Debt relief, including debt settlement, can be a useful tool for people who face unmanageable debt. But to make sure your outcome is positive you must choose the right program.
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