Debt Tool 5: Debt relief

Debt relief is a method of alleviating debt in several ways, including refinancing, consolidating, settling for less than you owe and more. It’s a powerful tool for those who are struggling to make monthly payments on their unsecured debt.

Like most things related to debt, there are pros and cons to the various debt relief strategies. However, debt relief can help some people find a way out of overwhelming debt. 

What is debt relief?

Debt relief refers to adjusting your current debt payments to make them more manageable. 

Refinancing, consolidating, settling your debt and even bankruptcy are all forms of debt relief.

When you agree with your lenders to pay less than you owe, that’s called debt settlement. Debt settlement generally requires a lump sum payment for the lower amount or agreeing to a payment plan. You can settle your debt directly with your lender or use a debt relief program like National Debt Relief.

Unlike debt consolidation, you may be required to pay the IRS income tax on the amount you no longer have to pay since the government agency considers this income. 

How debt relief works

Debt settlement can be done in either DIY or by working with a debt relief company.

If you choose to negotiate your debt settlement on your own, you’ll need to know exactly what you owe before you contact your creditors. You should also be prepared to propose a lump sum in an amount you can afford. It’s a good idea to research your creditor’s policies on debt settlement before you call so you understand your options. 

Working with a debt relief company takes the pressure off you to do the legwork for your debt settlement. It comes with a cost though: debt relief companies charge between 15% and 25% of the debt, plus additional fees.

Depending on your creditor, you may be required to make a lump sum payment or modified monthly payments on your settled debt amount.

Working with a debt relief company

Some criteria must be met before you qualify to work with most third-party debt relief companies. For example, you usually have to have at least $7,500 of unsecured debt. Most unsecured debts, such as car loans, personal loans, credit cards and medical bills, can be negotiated and settled.

Once you start working with a debt relief company, they will advise you to stop making payments to your creditors while they negotiate your settlement terms. Instead, you will pay to a savings account they set up. Note that negotiating can take between four to six months. Once the terms have been agreed upon, the company will use those funds to pay the negotiated amount.

Note that while you aren’t making payments, you’ll likely be charged late fees, and your credit score will drop. 

You can expect to have one point of contact from your debt settlement company, who will communicate directly with your lender on your behalf. This means you won’t have to respond to bill collectors anymore.

Once your debt is paid off, your accounts will likely be closed. This, and not paying your lender directly, will impact your credit score. However, you can repair your credit after and during your debt settlement payoff.

Is debt relief right for you?

If you struggle to make your monthly debt payments and have at least $7,500 in unsecured debt, debt relief might be a smart choice for your situation. You must also be able to keep making payments into a savings account instead of directly to your lender while the company negotiates on your behalf.

If you do not have any income, unstable income or your debt is secured such as a mortgage, debt relief is not for you. Additionally, if you can make your payments each month, you can save on the fees of debt relief by continuing to make payments and managing your debt on your own.

Continue to research debt relief and debt settlement to determine if it’s right for you.  

Other debt paydown tools to consider

Debt relief and settlement can work together with other debt paydown tools.

By budgeting for your debt, you can discover exactly how much you can afford to pay on your debt each month. You can also use this information to set up a repayment timeline.

Building a support system can help you stay motivated during your debt paydown journey. Your support system might include friends and family or local and government agencies such as food pantries and SNAP.

And finally, credit repair and credit repair companies can help you recover from debt once you’ve successfully paid it off.

Next steps

Debt relief and debt settlement are available for individuals with at least $7,500 in unsecured debt. Debt settlement terms can be negotiated by you directly with your lender or through the help of a debt relief company like National Debt Relief.

Before deciding if debt relief is right for you, research the specifics on qualifications, fees and other requirements. You can speak with National Debt Relief for free to find out how they work and if working together is a good fit for your financial situation.

For more information on debt relief, visit our National Debt Relief hub.