When it comes to getting help with debt, much of the “help” can provide more confusion than clarity and more cost than comfort. Case in point: The term “debt relief” doesn’t even have one particular meaning. Debt management, debt consolidation, and even bankruptcy fall under the larger umbrella of “debt relief” despite their significant differences. It’s enough to make someone want to give up.But that’s the last thing you need if you’re in deep with debt. That’s why we wanted to outline some important concepts you need to know about “debt relief,” and the options it might include. Since there’s no singular definition for debt relief, let’s start by talking about the services that are typically offered when a company talks about debt relief. As mentioned above, debt relief services often include debt settlement, debt management, debt consolidation, and even bankruptcy.
To settle debt is to reach an agreement with your creditor that says you’ll pay less than you owe and they’ll consider the debt payoff complete. This is something you could do on your own. However, many companies claiming to offer debt relief actually offer debt settlement services. When a company tries to settle your debt for you, they typically advise you to put your monthly payments to your creditors in an escrow account. After a certain sum is saved, they would then try to convince your creditors to accept it and forgive the rest of the debt. This can be a risky endeavor. While the money is being saved and payments aren’t being made, you could incur late fees, see your credit scores drop, and get calls from your creditors. What’s more, there’s no guarantee it will work.And, if it does, you’ll likely have to pay the company that helped you do it and potentially incur a tax for the forgiven debt, in which case you may want to consult an attorney.
Another service you may come across is something called a debt management plan. Like the debt settlement process described above, with a debt management plan, you would put your monthly payments into a separate account. Unlike the debt settlement process described above, the company would then make those payments for you. The idea here is that the company helping you will try to negotiate for you. This negotiation could include lower interest rates and fee forgiveness to help you make more progress toward debt payoff. Debt management plans often last for four years. They could also include a requirement that you don’t take out new credit or use your existing credit for the duration of the plan.
Here’s a confusing one.Like debt settlement, you are entirely within your own power to consolidate your debt. You don’t need a company to help you — you only need to qualify for a loan or line of credit designed to consolidate your debt.In fact, there are many credit cards and personal loans designed to help you pay off your debt. Once you’ve been approved for one of these products, it would then be used to pay off your other balances.From there, there are two things to think about:
- Making all payments on your debt consolidation loan or line of credit in full and on time
- Either closing the newly paid off account or refraining from using it until the consolidated debt is paid off.
As for how this relates to debt relief companies, some may say they offer debt consolidation when in fact they’re talking about debt settlement or debt management plans.If you want to consolidate your debt and your credit isn’t already significantly impacted, chances are you can find debt consolidation products and apply for them on your own.This doesn’t require any negotiation with your current creditors, and the whole consolidation process can be completed in a matter of days. As you can see, credit and personal finances are unnecessarily complex.
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