Borrowing is a common habit or necessity for most individuals. Housing, food, wear and tear expenses, lost jobs, medical bills, and other unforeseen happenings can make consumers tighten their belts. In particular, a debt relief program may appear to be something tempting when debts become overwhelming at some point. However, these programs have their advantages and disadvantages that you should consider to ensure that you are subscribing to the right plan. In more detail, this article focuses on what debt relief means, the types of programs, the costs of the programs, the effectiveness of the programs, and whether it is worth it for individuals to apply for the programs when they are bound with debts.
What is Debt Relief?
Debt relief is about the idea and services that assist people with their payments which they have to pay to the creditors in the future to minimize, modify, or even erase. Debt is the process of trying to ease debts by lowering interest rates, removing penalties, combining the debts, or coming up with more friendly ways of repaying the debts. Perfect solutions enable consumers to discharge such obligations in shorter periods and at less cost compared to making full payments.
There are two broad categories of debt relief programs; these include;
There are several major types of debt relief programs available from for-profit companies or non-profit credit counseling agencies:
Debt Management Plans: These programs assist in paying off all debts with one monthly payment and bargaining with creditors for lower interest rates and elimination of fines. There are also payments to creditors as per the stipulated credit agreements and payment terms.
Debt Settlement: Debt settlement companies engage with the creditors to agree on accepting a partial payment of the balance owed by the clients. This can cut down debts by one quarter to three quarters.
Debt Consolidation Loans: This a technique utilized by borrowers to obtain a fresh loan at a lower interest rate to clear many other expensive debts. This makes the payment process convenient and is charged monthly.
Bankruptcy: Bankruptcy legally discharges qualified debts via a process of selling assets (Chapter 7) or paying back a percentage of that amount within 3-5 years (Chapter 13). This one removes the most amount of debt and is used more often but has long-term impacts on the financial situation.
That is why debt relief programs’ costs are current and crucial to understanding the current state of the economies of the majority of developing countries.
Professional agencies provide the services free of charge intending to give an insight into the consumer’s situation. But, participating in a debt management or settlement plan is usually associated with some form of charge. Non-profit credit counseling services offer their services for small monthly fees which range between twenty-five dollars and fifty dollars. Debt settlement by a for-profit entity usually costs high initial fees that may be between 15% to 25% of the total amount of enrolled debt. The consolidation loan has closing costs and the lawyer fee in a bankruptcy case can be above $ 1500. In the same vein, always ensure that there is full disclosure of the costs involved before entering into any agreements.
Effectiveness and Success Rates
Does debt relief work? The answer to this depends on the program being applied and the motivation level of the client as well as discipline factors. Denning the statistical data of the industry it has been found that the management plans mostly have 60 to 75 percent success rates. Some 65% of those who enroll in plans finish them and settle debts for 3-5 years using the plan.
Debt settlement outcomes are somewhat stronger, however, the completion of programs is lower than 50%. Because plans encompass accruing big amounts of money that will be used to fund agreed-upon premiums, saving discipline and consistency with the service provider determine results. Consolidation loans help repay debts through the reduction of interest rates for better repayment. Bankruptcy immediately discharges or reforms debts through the Supreme Court but should be the final option because it adversely affects credit scores and credit.
Is Debt Relief Worth the Money? Pros vs Cons
Therefore, if you are in a position where you need help with getting out of debt, then you should search for professional debt relief. Once more, it is possible to answer this question only on an individual basis taking into consideration a customer’s financial status. Below are some key pros and cons to weigh when deciding:
Pros:
- Lowered or eliminated interest charges and costs cut down cost
- May avoid bankruptcy and help clear debt quicker
- Consolidation is beneficial since it entails a single payment of the loan as compared to the many payments that one would be required to make when dealing with multiple loans.
- Assists in offering professional advice concerning the management of debts
Cons:
- Does not address ongoing expenditures, which lead to debt problems
- Even though settlement and consolidation loans are important for those who need money for a long-term purpose, they still must be paid back.
- The initial contract charges can also be steep and charges that are recurring are not cheap.
- Credit score harm expected for at least 2 years
- Tax consequences relating to the interest rate on settled debts and savings
Debt relief can be used as the final safety net before an individual files for bankruptcy. Nevertheless, this does not mean that there are no students enrolled for a particular course and they cannot succeed in it. Such programs need to function within strict budgets, enforce the strict process of directing funds toward payment, and be long-term processes engaging with credit counselors or agencies for months or years. Debt relief is intended to help consumers get out of the financial pinch they find themselves in, but it does not always attempt to correct the causes that put consumers in a situation where they have to accrue more debts than they are capable of handling.
In conclusion, when one reaches a point of getting deeper in debt and no sign of repaying it ebbs on the horizon, then debt relief should be considered. Entering a program means signing up for long-term obligations to repay the same debt in different conditions. Hence, there is a need to assess one’s motivation and available funds to see if they have what it takes to follow through on the plan. Otherwise, it is still possible to get stuck with a relief, having debts returned to collections or declared bankrupt, but without improving one’s financial state.
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