Debt relief could involve wiping the debt out altogether in bankruptcy; getting changes in your interest rate or payment schedule to lower your payments; or persuading creditors to agree to accept less than the full amount owed.
The debt relief industry includes scammers who are eager to take what little money you have. Many people who enter debt relief programs fail to complete them. You could end up with debts that are even bigger than when you started.
But debt relief may give you the new start or the breathing room you need to finally make real progress.
Be sure you understand — and verify — these points before entering any agreement:
- What you need to qualify
- What fees you will pay
- Which creditors are being paid, and how much; if your debt is in collections, make sure you understand who owns the debt so payments go to the right agenc
- The tax implications
A Few Things to Remember
Before we dive into the different debt relief options, understand that the debt you carry makes up just under one-third of your credit score. So, when you pay off debt, especially credit cards that are close to their credit limits, you should see improvement in that part of your score.
However, understand that our analysis of credit relief plans is based on generalities. It doesn’t necessarily represent exactly what will happen in your case.
How far your score drops—and how quickly it bounces back—depends on a lot of different factors. If your payment history always shows on-time payments, for example, and you suddenly file for bankruptcy, your score will probably drop more than someone who was already severely delinquent.
But it’s impossible to predict how a particular approach will impact your individual credit if you’re not familiar with your credit history—so get a free Credit ReportCard from Credit.com to see a summary of that history. Remember too, that you can obtain your free annual credit reports once a year from annualcreditreport.com.
With this information in mind, here are the main approaches to debt relief you may consider, along with a review of the impact they could have on your credit reports and scores.
A credit counselor is a professional who can advise you on how to handle and successfully pay off your debt. A simple call to a credit counseling agency for a consultation won’t impact your credit in the slightest. But if the credit counselor or agency enrolls you in any kind of consolidation, repayment, or management plan, that could affect your credit.
Make sure you fully understand the potential impact of any debt relief program before you sign up. Don’t be afraid to ask the credit counselor how a new plan could alter your credit.
Before digging too deeply into why you should steer clear of debt reduction and debt consolidation services, you probably want to know exactly what we’re talking about.
Basically, a debt reduction service promises (for a fee) to help clean up your debt mess by working with your creditors. Usually, those promises come in one of two forms: debt settlement and debt consolidation.
Debt settlement companies take the money you pay them and use it to negotiate with your creditors to reduce or eliminate what you owe. The problem is, they charge way more than you would pay if you just settled the debts on your own.
Debt consolidation companies combine all your debts into one single debt—usually at a lower interest rate. That sounds good on the surface, but they don’t really get rid of your debts. They just move them from one place to another.
Furthermore you can apply for the IRS government payment plan called an Offer in Compromise (OIC) to resolve the remaining amount. Depending on your financial capacity and upon acceptance, the IRS significantly reduces the total debt that you can pay. This reduced amount can be paid in a lump sum or in fixed monthly payments.