Debt Relief Options

If you are struggling with debt, you aren't alone. Many people are in the same boat.

Unfortunately, in some situations, your debt begins to feel unmanageable. If that happens, exploring debt relief options could help you ‌take control of your situation and improve your finances.

There are many different types of debt relief programs you could consider, and important differences in how the available solutions will impact how long it takes to pay off debt, the total amount you pay, and your credit score.  

This guide will discuss some of the most common debt relief options, including debt management plans (DMPs), debt settlement, Chapter 13 bankruptcy, and Chapter 7 bankruptcy. Learning about the different methods of getting out of debt will help you decide which one is right for you. 

When to Seek Debt Relief Help

Most people have some type of debt, whether that's mortgage debt, a car loan, a personal loan, or credit cards. Simply owing money isn't a problem. 

Debt does become a problem, though, if:

• You're struggling to make your monthly payments.

• You can't accomplish other financial goals because you owe too much.

• You make payments, but the balance doesn't decline because your interest costs are so high.

• You're worried about your debt to the point that it impacts your daily life.

If you find yourself experiencing any of these issues, then it's time to look into debt relief options that could improve your situation. 

Your debt-to-income ratio can also give you a clue about whether you've taken on too much debt. This is how much you owe versus how much you earn. To calculate it, you'll add up all of your monthly payments and divide that amount by your gross (pre-tax) income. 

For example, if your credit cards, car loan, mortgage, and other debts add up to $1,000 per month and your gross income is $3,000, you'd calculate your DTI ratio by dividing $1,000 by $3,000 and multiplying by 100. So, in this case, you'd have a 33% debt-to-income ratio. 

If your DTI is above 43%, you may have taken on too much debt, and you could have a harder time getting approved for new credit in the future. It may also be worth exploring credit card debt relief or other debt-relief options when your DTI is this high.  

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DIY Debt Relief

When you're overwhelmed with debt, DIY debt relief is an option. You can take steps on your own to manage your debt, including the following:

• Use the debt snowball method to pay off debt: With the debt snowball method, you make minimum payments on all your debts except the smallest one. On that one, you pay as much as you can until it’s paid off. Then continue to the debt with the next lowest balance until all your debts are repaid. The idea is that paying off your smallest debts quickly will help you stay motivated. 

• Use the debt avalanche method to pay off debt: You'll make extra payments on your debt with the highest interest rate first using this method, then move on to the debt with the next highest rate. This saves you the most money on interest. But if your most expensive debt is large, it could take longer to reach your first payoff. 

Read: Debt Snowball vs. Debt Avalanche: Which Is Better?

• Explore debt consolidation: When you consolidate debt, you'll take out a new loan and use it to pay off multiple smaller debts. You may be able to lower your rate and simplify repayment since you'll have only one payment to make after consolidation. 

• Negotiate with creditors: You can ask your creditors to accept less than the full amount you owe but consider it payment in full. You could suggest a single lump sum payment or a payment plan. 

Each of these options can require a lot of discipline if you try to do them yourself. They won't work if you don't have extra money to pay toward your debt and can't qualify for a new loan.

Dealing with debt can be overwhelming and frustrating. Negotiation with creditors could be difficult and stressful. While DIY options work for some people, others appreciate professional guidance.  

Professional Debt Relief 

If your debt feels unmanageable and you aren't comfortable exploring and implementing solutions yourself, it's time to get professional debt relief help. 

As Freedom Debt Relief testimonials show, many people appreciate having a professional help them find a solution or negotiate with creditors on their behalf. A professional debt relief company can evaluate your debt situation and help you choose the solution that works for you. 

Debt management plan (DMP)

Nonprofit credit counseling agencies can help you implement a debt management plan if you have unsecured debts. Personal loans and credit cards are two common examples of unsecured debts.

When a credit counselor helps you create a debt management plan, your counselor will reach out to your creditors to ask them to reduce your interest rate or waive fees. 

You will deposit money into a special account with the credit counselor as part of your DMP instead of making payments directly to your creditors. Your counselor will then distribute the money among your creditors according to the terms of the plan. The credit counseling service also collects a monthly fee from your payment.

Debt management has a lower impact on your credit score than debt settlement or bankruptcy because you completely repay your creditors. However, your credit cards are typically closed as part of your plan, which typically lowers your credit scores until you pay off those accounts.

A DMP is designed to fully pay off your unsecured debts in three to five years. You'll need to make sure you can keep up with the monthly payments to make the plan work. 

Debt settlement

Also called a “debt relief program,” debt settlement could be an effective way to reduce your debt. Debt settlement involves a creditor agreeing to accept less than the entire amount owed as full payment. Creditors are more likely to do this if you are clearly experiencing a financial hardship and negotiating an agreement looks like their best chance of getting paid anything at all. 

When you work with a debt settlement company, the company will negotiate with creditors on your behalf. While debt settlement companies charge a fee, they often have relationships with creditors and understand effective negotiation techniques, so they may be able to help you get a better deal than you could get on your own. 

Debt settlement plans can take time, as you'll need to get together enough money to make each of your creditors an offer. It’s hard to afford to save money when you’re struggling with debt. Most people choose to stop making payments to creditors while they build up funds for settlement offers. The money goes into a dedicated account set up by the debt settlement company, but you always own and control the account.  

Stopping payments is all but guaranteed to have a serious negative impact on your credit standing.

Once there's enough money in that account, your debt settlement company can start negotiating. Most people settle their first debt within a few months. 

Forgiven debt may be considered taxable income by the IRS. But if you’re insolvent when you begin settling debts, meaning your debts are worth more than the things you own, the forgiven debt won’t be subject to income tax.

Debt settlement is often the first step in building a better financial future, as you get rid of your debt, pay your bills on time, and avoid maxing out your credit cards in the future. 

Bankruptcy

If you need legal protection from your creditors, you might be a candidate for bankruptcy.

Chapter 7 bankruptcy lets you walk away from your unsecured debts. This kind of bankruptcy is means-tested. Translation: You can't qualify for this debt relief option if you have the means to pay back your debts. If you file for Chapter 7, you could lose some of the things you own. The bankruptcy court could sell them and give the money to your creditors. 

Chapter 7 can often be completed in a matter of months.

If you earn too much to qualify for Chapter 7, you’ll be directed to Chapter 13 bankruptcy, which is a payment plan. There's no means test and the court won’t sell your belongings. You won't just have your debt wiped away, though. You'll be placed on a repayment plan lasting for five years (three years if you’re low income). You'll pay off your creditors according to the terms of the plan, and any balance left on unsecured debt at the end will be forgiven.

Bankruptcy can stay on your credit report for seven to 10 years and will severely affect your credit score. However, it can provide a clean slate and a chance to start anew. You'll likely need a lawyer to help you with the process, though, so you should be prepared for legal fees. Bankruptcy is also public, and future employers can see that you filed. 

Ultimately, all of these debt relief options can be appropriate in the right situation. Your best solution depends on how bad the problem is, how comfortable you are tackling the problem yourself, your desire to keep your solution private, and how much control you’re willing to give up.