Got Bad Credit? Debt Relief Options Worth Considering
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Like the chicken and the egg, it can be hard to determine which came first between bad credit and debt.
High debt can drop a credit score.
A low credit score can make it difficult to get good loan rates, which could lead to borrowers taking out high-interest loans they can’t afford, which could then mount their debt.
However it works out, improving one can also help the other.
For some people, that can require help getting their debts under control. Here are some debt relief options that could help.
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What is debt relief?
Debt relief is a broad term that encompasses various strategies and solutions designed to reduce, restructure, or eliminate debt owed by individuals, businesses, or even countries. Debt relief aims to provide relief to debtors struggling to manage their debt obligations, making it easier for them to regain financial stability.
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Debt relief options
Debt settlement
You can do many of the below tasks yourself, but sometimes it pays off (literally) to pay someone to do it for you. Debt relief companies, also called debt settlement companies, can be the first place to start if you have more than $10,000 in debts.
Their main goal is often to help you consolidate debts into a single payment cheaper than what you’re paying now. They do that in part by negotiating your debt repayment amount, with the idea that a creditor should get some money on debt than nothing at all.
Debt settlement may sound like a good thing. After all, you no longer have to pay the full outstanding balance after a debt settlement company has negotiated a lower payment. That can be half to 80% of the balance.
A big downside is that it will probably hurt your credit score. The debt settlement company doesn’t pay your creditors while negotiating lower payments so that the late payments will be reported to the credit bureaus.
Before hiring a debt relief company, be wary of those asking for an upfront payment from you, promising to improve your credit score, or making any guarantees. They typically charge a fee of 15% to 25% of the amount settled.
A legitimate debt relief program may ask you to pay into an escrow account to cover payments it negotiates for you. Or, it may advise you on how to pay your creditors.
Related: Best Debt Settlement Companies
Debt consolidation
At its core, debt consolidation involves combining several debts — often credit cards, personal loans, medical bills, and other unsecured debts — into one consolidated loan. This newly minted loan typically comes with a lower interest rate, a longer repayment term, or both, making monthly payments more manageable and reducing the overall cost of debt over time.
There are several vehicles through which debt consolidation can be achieved:
Consolidation loans
If a lot of your debt is from multiple smaller loans, such as credit cards with different interest rates, one large loan at a lower rate than the average for the other loans will lower your costs.
You can do this by transferring high-interest credit card balances to ones with lower rates in a credit card consolidation move. However, having bad credit can make it difficult to find low-interest loans, and subprime loans could be higher than the rates you’re already paying. Personal loans can also be used to consolidate debt.
Debt consolidation loan companies may be unable to move your debt to a lower interest rate, but they can often lower your monthly payments by stretching out your loan over a few years.
That means paying more interest over the new loan term, but it can at least make the payments more affordable.
Another benefit of making one payment to one lender instead of multiple lenders is that you’re less likely to miss payments. That could improve your payment history, which accounts for 35% of a FICO credit score.
Balance transfer credit cards
This method involves transferring outstanding balances from multiple credit cards to a single card that offers a low introductory interest rate. If managed prudently, this can significantly reduce interest costs, although paying off the balance before the promotional period ends is crucial to avoid higher interest rates.
Home equity loans or lines of credit
A home equity loan is another way to pay off your debts. You can borrow up to 80% of the equity you have in your home and pay it back over the years.
If you have good credit, these loan rates are easier to get, but some lenders will work with you even with bad credit. They include Lending Tree and the home mortgage divisions of big banks such as Wells Fargo, Bank of America, and CitiMortgage.
A lump sum of cash is provided in a home equity loan. How much equity do you have in your home? A simple calculation is to subtract the balance of your current mortgage loan from the value of your house. Your home’s value is likely higher than what you paid for it. An appraiser will determine the value of your loan.
Suppose you bought a home for $200,000 and made a $40,000 down payment. That immediately puts your equity at $160,000. After years of payments, suppose the total due on your mortgage is now $150,000. That increases your equity to $50,000.
But that assumes your home hasn’t increased in value over the years.
As determined by an appraiser, let’s assume your home’s value has increased to $300,000. That puts your equity at $150,000, assuming you owe $150,000 on the mortgage.
The math is 300,000 - 150,000 = 150,000.
From that $150,000 in equity, a lender will allow you to borrow up to 80%. You don’t have to borrow that much, but you can. In this case, 80% of $150,000 is $120,000.
Debt management plans
Nonprofit credit counseling agencies can set up a debt management plan, or DMP, for you. You can find a credit counseling agency by searching the National Foundation for Credit Counseling and the Financial Counseling Association of America.
The agency will create a debt management plan to lower interest rates and fees and negotiate reduced payment amounts with lenders. You’ll still pay off the principal amount, so it shouldn’t affect your credit score.
A DMP is similar to a debt relief or settlement company, though nonprofit credit counseling companies administer DMPs. Debt settlement companies, on the other hand, are for-profit.
The DMP could last three to five years when you’ll generally be unable to use credit cards or open new lines of credit. Missing a payment could derail the plan and end your interest rate reductions.
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- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Credit counseling
Credit counseling offers a guiding light for individuals navigating the complexities of debt management, acting as both an educational resource and a practical support system. Unlike debt consolidation, which focuses on restructuring financial obligations into a single loan, credit counseling empowers individuals with the knowledge and tools needed to tackle debt through informed decision-making and strategic financial planning.
This process typically begins with a comprehensive assessment of one's financial situation, including income, expenses, debts, and overall financial goals. Credit counselors, often part of nonprofit organizations, provide these services with the aim of educating clients on budgeting, debt management, and ways to improve financial habits.
Key aspects of credit counseling include:
- Budgeting assistance. Counselors work with clients to develop a detailed monthly budget, identifying areas to cut expenses and ways to allocate funds more effectively toward debt repayment.
- Financial education: Credit counseling agencies provide valuable educational resources on managing money, using credit wisely, and building a solid financial foundation. This education can include workshops, seminars, and online materials.
- Negotiation with creditors: Credit counselors may negotiate with creditors on the client's behalf to lower interest rates, reduce monthly payments, or waive late fees and other penalties.
Renegotiate your debt by yourself
Instead of paying a fee for a company to negotiate better terms with your creditors, you could do the work yourself.
Calling a credit card company before you start falling behind on payments and explaining your problem will likely get you at least a reprieve. Losing your job during the coronavirus should allow you to put off payments for a few months and give you time to set up a payment plan.
Some financial problems are temporary. Losing a job, hospitalization, or totaling your car and needing a new car to get to work are issues that can be overcome. You may need some time to get back on your feet, and a call or letter to creditors can let them know that you plan to repay them but need some relief now to get there.
Tell them you might have to declare bankruptcy if they don't renegotiate credit terms. They would then have to compete with other creditors for your money, and that’s likely a scenario they don’t want to deal with.
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- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Bankruptcy
While often viewed as a last resort, bankruptcy offers a legal pathway to address insurmountable debt. This process is designed to provide individuals or businesses a fresh start by discharging debts or implementing a structured repayment plan under bankruptcy court protection. Essentially, it's an acknowledgment that your financial liabilities have surpassed your ability to pay, necessitating legal intervention to distribute any payment capability among creditors equitably.
In the United States, there are primarily two types of bankruptcy declarations for individuals: Chapter 7 and Chapter 13.
- Chapter 7 Bankruptcy, or liquidation bankruptcy, involves a trustee selling non-exempt assets to pay off creditors. This option seeks to discharge most unsecured debts (like credit card debt, medical bills, and personal loans), offering a clean slate. However, not everyone qualifies for Chapter 7, as it requires passing a means test comparing your income to the median in your state.
- Chapter 13 Bankruptcy, on the other hand, is more of a reorganization of debts. It allows individuals with regular income to develop a plan to repay all or part of their debts over three to five years. During this time, debtors can make manageable payments towards debts, often with more favorable terms, such as lower interest rates. Chapter 13 protects assets from liquidation and can provide a way to catch up on missed mortgage payments or avoid foreclosure.
Initiating a bankruptcy claim signals to creditors a serious intention to resolve overwhelming debt. It conveys the stark reality that the ability to recover owed funds diminishes significantly without intervention. The bankruptcy process, while offering relief, is not without its consequences. It can significantly impact your credit score, making it difficult to obtain new credit, and can remain on your credit report for up to 10 years for Chapter 7 and 7 years for Chapter 13. Moreover, debts such as student loans, alimony, child support, and most tax debts are typically not dischargeable in bankruptcy.
Debt forgiveness
Debt forgiveness is predicated on the creditor's decision to absolve the debtor from their financial commitments, a gesture that, while seemingly altruistic, can also serve the creditor's interest in certain contexts. Acknowledging that recovering the full amount may be improbable due to the debtor's financial circumstances. Thus, creditors might opt for forgiveness to recoup a portion of their losses immediately or as part of a settlement rather than enduring prolonged, uncertain repayment processes or receiving even less in bankruptcy proceedings.
Debt forgiveness is most commonly encountered in scenarios such as:
- Student loan forgiveness. Various programs exist, particularly for federal student loans, where debt can be forgiven after a certain period of payments, especially for borrowers working in public service, education, or certain other sectors.
- Credit card debt forgiveness. Credit card companies might occasionally forgive a portion of the debt as part of a settlement agreement, especially if the debtor demonstrates significant financial hardship.
- Mortgage forgiveness. In rare cases, such as during the housing crisis, lenders forgave mortgage debt or part of it to prevent foreclosures.
- Medical debt forgiveness: Some hospitals and healthcare providers may offer debt forgiveness for patients who cannot pay their medical bills and do not have insurance or adequate coverage.
- Tax forgiveness. Governments may offer tax forgiveness programs to alleviate the burden of back taxes under specific conditions.
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- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Types of debt
Debt relief programs can address various debt types, helping individuals and businesses manage or reduce their financial burdens. However, the suitability of a debt relief program depends on the specific circumstances of the debt and the terms offered by debt relief service providers. Common types of debt that can be addressed through debt relief programs include:
- Credit card debt. High-interest credit card debts are commonly managed through debt settlement, consolidation, or credit counseling programs.
- Medical debt. Unpaid medical bills, which can accumulate quickly due to illness or injury, might be settled or managed through negotiation with healthcare providers or debt settlement programs.
- Personal loans. Unsecured personal loans, including those from banks or peer-to-peer lending platforms, can often be consolidated or restructured.
- Payday loans. These high-interest, short-term loans can sometimes be managed through consolidation loans or by negotiating payment terms.
- Student loans. Certain debt relief options are available specifically for federal student loans, including repayment plans based on income, loan forgiveness programs for those in certain professions, and consolidation. Private student loans are more challenging to manage but can sometimes be refinanced or negotiated.
- Mortgages. Homeowners struggling with mortgage payments might qualify for modification programs that can adjust interest rates, loan terms, or principal amounts. Foreclosure prevention programs also fall into this category.
- Auto loans. Like mortgages, auto loans can sometimes be restructured to provide more manageable payment terms.
- Tax debts. Individuals owing back taxes to the government might qualify for relief through installment agreements, or compromise offers with the IRS or other tax authorities.
- Utility and other bills. While not typically considered traditional debt, overdue utility bills, telecom services, and other regular expenses can sometimes be managed through negotiation or assistance programs to prevent service cutoffs.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
The bottom line
Navigating the path to becoming debt-free requires careful consideration of the amount of debt, the feasibility of maintaining minimum payments, and the potential impact on one’s financial future. Seeking assistance from accredited debt relief agencies can offer a structured and informed approach to managing overwhelming debt burdens. Debt relief organizations can provide valuable guidance on consolidating debts into more manageable payments, negotiating terms to reduce the overall amount owed, or developing a plan to strategically allocate resources towards paying off debts.
Ultimately, the goal of any debt relief effort is to create a sustainable path forward, allowing individuals to transition from juggling minimum payments and growing interest to achieving financial stability and reclaiming the peace of mind that comes with being debt-free.
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