Types of Debt Relief Programs That Can Help You Get Out of Debt

Most of us are just one unlucky break away from a financial crisis. For many, the covid crisis has meant job losses or business collapse, not to mention personal or family illness or bereavement. While Covid has magnified those crises, they are a constant feature of our human existence. 

Insurance can help mitigate the worst of those disasters, and we have lots of information on personal and business insurances to consider elsewhere on the site. But if you are past that point then you will have to consider debt relief. If you are in the UK, make sure to get advice from Citizens Advice or another reputable organisation.  If you are US-based, read on, the rest of this article is for you.

How Do Debt Relief Programs Work?

Debt relief is a broad term that covers every solution that makes paying up debt quicker, easier, and cost-efficient. The solution would include DIY solutions such as a consolidation loan or debt relief program. Debt relief programs provide debtors with a convenient and workable way out of their money problems. Some of these solutions help consumers to make payments they can pay with ease at the same time reducing and eventually clearing one’s debt. Below we outline the main types of debt relief programs available in the United States. 

  • Debt Consolidation Program

The first type of debt relief program to be discussed here is the consolidation program. It aims to help you pay back your debt in full to avoid credit damage. A consolidation program eliminates interest charges and additional fees. This way, it becomes easy for you to clear what you owe and your focus would be on paying off the main debt and not the interest.

Depending on the type of debt owed, there are different names that debt consolidation programs are called. They are called debt management programs if they’re covering credit cards alongside similar unsecured debts, an installment agreement when IRS back taxes are being settled, and if there are various types of federal student debts, it is called Federal student loan repayment plans. 

One major advantage of using a debt consolidation program is that it helps you completely repay everything you owe. This would improve your credit score, thereby, giving you the satisfaction that your obligations have been met. 

  • Debt Settlement Program

This debt relief program essentially involves a company that acts as your mediator to convince your creditors to accept a lower balance rather than them instead of the full settlement you were owing. The offer from debt companies is usually enticing and may sound amazing, but according to the Consumer Financial Protection Bureau, such debt settlements are risky.

While negotiations are in progress, the debt settlement company will ask you to subsequently stop payments to your creditors but that wouldn’t stop penalty charges, late fees, and interest from increasing. This would have a negative impact on your credit score making you accrue more debt than you began with. The fees for debt settlement companies are usually high. Some companies like the National Debt Relief charge between 18% and 25% of your actual debt and the program can last for close to four years. 

Debt settlement companies are actually able to make any drawbacks and even fees worth it; you should, however, examine your options properly. Bear in mind too that the negotiations might not always be successful but you won’t be required to pay any fees if it was unsuccessful. 

  • Deferment

This type of relief program grants you the opportunity to suspend debt payments for a while. The creditor would allow you to halt your installment payments without incurring additional fees and has no negative effect on your credit. 

You might still have to pay the interest on the loan when you defer except in special situations like when you’ve got a federal student loan. The payment can be deferred till you’re done with school while the government pays the interest during your study. If the loans are not subsidized, you can defer the payments but interest on the loan accrues. While you go to school, the money you owe keeps increasing. 

Deferment is not only done on student loans, other types of debt can be deferred as long as you get the lender’s approval. How would you know if your creditor offers debt deferment? Put a call across to them. Deferment is good when you run into difficulties in paying back your debt.

  • Bankruptcy

When you’ve tried all that you can but have found no other option, then it might be wise to declare bankruptcy. It should, however, be your last option. After declaring your bankruptcy, the court will do a critical review of your case or situation. If they agree that you’re truly not able to repay your loan, a court order will be issued to render the debt null and void. You would no longer be required to pay the debt on your credit cards, personal loans, or medical bills.

There would be no more emails or notifications harassing you about the debt because it has been discharged. Sounds like a good offer, right? Yes, but the truth is bankruptcy has its own consequences. That information can remain on your credit report for years which might make it difficult for you to get credit when you need it, purchase a new home, or qualify for life insurance. Also, the process is pretty expensive as you’d be tasked with paying court fees, and of course, hiring an attorney is equally costly.

  • Loan Modification

Loan modification competently changes the agreement, it can change the loan amount or length of the term. There is also an option for you to switch from adjustable to a fixed rate. In essence, your loan can be modified to meet your needs or so you get lower payments.

A mortgage is the prevalent type of loan modification; when the value of your property is now less than the mortgage balance left, modification can help match the loan amount to the current property value.

Thinking about how to settle your debts can be pretty frustrating especially if you run a business. There are so many relief schemes available and sorting through a preferred one might be challenging, but hopefully, this article points you in the right direction.