It’s easy for you to feel as though you’re always lagging financially when you’re in debt, but you’re not alone. Studies show that 19 percent of Americans have nothing set aside for emergencies and 58 percent of individuals with debt claim that it keeps them from attaining long-lasting financial stability.
Therefore, in pursuit of financial freedom, most individuals resort to finding debt relief solutions. However, one question predominantly arises concerning debt relief programs – do they really work?
What Debt Relief Programs Do
Debt relief programs provide debtors with efficient resolutions to financial difficulties. Ideally, they allow people to find affordable debt repayment options based on their income to ensure that they reduce and ultimately clear their outstanding dues. The programs may involve the service provider requesting your lender to reduce the number of monthly payments, lower the interest rate, dramatically diminish the owed amount, or extend the repayment term by at least one year.
There are five major types of debt relief. Although each debt relief program has specific debt management strategies and timelines, it may typically take three to five years for you to completely eradicate your debt and restore your credit.
The five debt relief options include credit counseling, which is quite simple as it only requires you to create a budget and cut back on unnecessary expenditures. However, research shows that only 40 percent of consumers work with a budget. Other debt relief solutions entail filing for bankruptcy, debt management, debt consolidation, and debt settlement.
Debt settlement can help some people get out of debt at a cost much less than their total debt. On the other hand, it has proven futile for countless others. Regardless, here’s some information to assist you in knowing when it can work for you.
How Debt Settlement Works
Otherwise referred to as debt adjustment, you need to understand how debt settlement works so you can be in a better position to determine whether or not it can work for you. It refers to the process of settling delinquent debt, where you pay significantly less than the original amount owed by promising the lender a lump-sum payment. Even though it often depends on your situation, debt settlement offers may range between 10 to 50 percent of the entire amount you owe, and it’s up to the creditor to decide which one they can work with.
As a consumer, you can choose to settle your debts without professional assistance, but keep in mind that it may hurt your chances of successfully rebuilding your credit. Alternatively, you can hire a debt settlement service provider. In that regard, you may be required to pay the company a fee that’s often a percentage of the total debt you owe.
The company can’t change this amount unless it manages to clear your debt. According to the American Fair Credit Council, debt settlement is the cheapest debt resolution option, surpassing common techniques such as minimum monthly payments and credit counseling. Therefore, it may be a good idea if you’re looking to rebuild your credit affordably.
Risks and Dangers of Debt Settlement
With adequate knowledge of how the process works, knowing the risks and dangers of debt settlement can also help you make the right choice. While most companies can successfully help rebuild your credit, there are certain risks associated with this debt resolution strategy.
For starters, success is not guaranteed since some creditors can outright decline to negotiate with debt settlement companies. Debt totals may also rise due to the constantly accumulating fees, making it hard to avoid aggressive debt collection strategies.
Besides that, you may end up getting taxed for the amount of debt forgiven since the Internal Revenue Service generally considers forgiven credit as income. Past that, working with a debt settlement service will require you to pay additional fees that may include account setup and maintenance fees.
Moreover, once the debt has been fully settled, you’re still going to pay the service company a fee that’s often a percentage of the enrolled debt. Debt settlement can also hurt your credit score. In most cases, debts charged off by lenders along with delinquent loans can stay on your credit record for up to seven years.