When Should You Consider a Debt Relief Program?

using debt consolidation

Households in the US carry an average of $7,400  in consumer debt. Whether indebtedness comes from having to use credit after loss of a job, a large medical bill, or from years of overspending, there comes a time when bills outpace income and something has to give. No one sets out to have crushing debt payments, but unfortunately that’s how many people end up. Sometimes those in debt need outside help to manage their situation, but when should you consider a debt relief programs?

Can I Pay Off Debt on My Own?

Before consulting a debt relief agency, determine if it’s possible to pay off balances on your own. Is there a way to cut expenses or increase income enough to make payments more manageable? Credit card companies may work with you by lowering interest rates or it may be possible to transfer high interest balances to zero interest promotions.

Remember that promotional offers may charge a fee for balance transfers and there is usually a limited time period before interest rates go up. If you can’t pay off the balances in the allotted amount of time, or if your credit is not good enough to get interest rate reductions, it might be time to seek professional help.

Debt Consolidation vs. Debt Settlement

Debt relief agencies can offer several plans depending on your situation. The two most common are debt consolidation and debt settlement.

Debt consolidation happens when an agency negotiates with creditors to make payments more manageable, often with a lower interest rate. Clients make one payment each month or pay period to the debt agency who then pays your creditors. With this type plan, payment amounts are lower but the repayment period is increased. There is no reduction in the amount of debt owed, only a change in the terms of debt repayment so you can afford to cover what you owe without having to declare bankruptcy.

Debt settlements occur when you or an agency negotiates with creditors to accept a lump sum payment to settle your debt, usually for a much smaller amount than the overall balance. This type program only works if you have the cash on hand to actually pay the bill. Be careful that any lump sum payment isn’t going to leave you vulnerable to running up credit card balances again if an emergency pops up.

Most people who struggle with debt don’t keep a large amount of money sitting around, so the agency accepts monthly payments until your account balance is big enough to pay off the agreed settlement amount. However, there are some negatives that come with this type plan.

  • When seeking debt settlement, companies will usually ask that you stop making payments. This can incur extra interest and penalties that might negate any savings gained in the settlement.
  • Debt settlement will negatively impact your credit score.
  • If you use an agency and miss a payment, the company might be able to keep your money.
  • If a portion of your debt is forgiven, there could be tax consequences. Always consult a tax professional before taking a debt settlement.

No Plan Works Without Changing Behavior

No debt management plan works if you don’t change the behaviors that got you into trouble in the first place. To keep from spending more than you earn, it’s important to budget, track spending, and learn to save up for purchases if you don’t have the money to pay in full. It is possible to recover from debt, but you have to take control of your finances and work hard not to make the same mistakes that caused you to need a debt relief program.

Have you ever sought professional help to get out of debt? 

Disclaimer: I was compensated for this post by Fast Track Debt Relief, but all opinions are my own.

 

Image: Flickr/MeddyGarnet

 

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Written By
Sydney White is a Texas-born stay at home mom who enjoys spending time with her family, bargain hunting and, of course, writing. She is currently the editor-in-chief of Snipon.com.

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