Americans are struggling to keep up with their credit card bills. The share of cardholders making only the minimum payment recently hit a 12-year high, and delinquency rates have been climbing over the past year, according to the Federal Reserve Bank of Philadelphia.
If you’re trapped in the cycle of barely affording your minimum payments each month — or worse, you’ve already fallen behind — debt relief is one path to getting your finances under control. But it’s not right for everyone. Here’s what to know about debt relief, plus some alternatives if your balances are overwhelming you.
Debt relief companies could help you settle outstanding debts
If you have significant debt, debt relief (or debt settlement) could be worth considering. When you go this route, you work with a company to settle your outstanding debts for less than you owe. Just keep in mind that your creditors aren’t guaranteed to accept a settlement offer.
“Even though settlement isn’t guaranteed, working with a professional can still be beneficial,” says Ashley F. Morgan, a Virginia-based bankruptcy attorney.
Here’s a general step-by-step of how the process works.
1. Consult with a debt relief company
Debt relief companies typically offer a free consultation for prospective clients. During this call, you’ll talk about your finances with a company representative, and they’ll help determine if you qualify for debt relief. To qualify, you’ll generally need several thousand dollars in debt — typically at least $7,500 — though the amount can vary depending on the company you choose.
Companies will usually ask about why you’re struggling with your debt, too, and this is the time to talk about things like an income loss, medical bills or other life events that may have upset your budget.
2. Stop paying creditors (if you haven’t already)
If moving forward with a debt relief program seems like the best course of action, they’ll likely suggest you stop paying your creditors if you haven’t already done so. This is optional, but stopping payments gives you leverage for negotiations with your creditors. That said, it does come with risks: Your creditors will report the missed payments to the credit bureaus, and those delinquencies could stay on your reports for up to seven years. Creditors could also penalize you with fees and higher interest charges for stopping payments.
3. Make deposits for settlement negotiations
As part of the debt settlement process, you’ll also set aside money for settlement negotiations in a dedicated savings account. The debt relief company will set up this account with one of its partner banks, and you’ll pay into it on a regular basis, often making biweekly or monthly autopay deposits. The company will help you decide on how much you should be depositing. For many customers, the deposits are less than their total monthly debt payments.
Once you’ve saved approximately 20% of an enrolled debt account, the debt relief company will contact your creditor to try and negotiate a settlement. “These companies often have experience and can predict what a specific creditor might settle for, and this insight can be valuable,” Morgan says.
Finally, you retain control over the savings account at all times. If you drop out of the program, that money (minus any fees for approved settlements) is yours to keep.
4. Review and approve settlement offers
If their negotiations with a creditor are successful, your debt relief company will contact you with a settlement offer. This offer will detail how much your creditor is willing to settle for and the fee your debt relief company will charge for the settlement. Generally, companies charge between 15% to 25% of an enrolled debt. So if you have $5,000 in enrolled debt, you could end up paying the debt relief company between $750 and $1,250 in fees.
Once you approve a settlement, your debt relief company will draw that amount and any applicable fee from your account. Settlements are often paid in a lump sum, though some companies may also negotiate payment plans so you can repay your debt over time.
Negotiating with creditors on your own
While working with a debt relief company might save you some hassle, you can also negotiate with your creditors on your own. Again, there’s no guarantee your creditors will be willing to settle your debts, but it could save you money on settlement fees. That said, you’ll need to be disciplined enough to put aside some money each month for a settlement, Morgan says.
If you go the do-it-yourself route, the negotiations process could look something like this:
- List and evaluate your debts, paying particular attention to whether you’re delinquent on payments.
- Determine your goals for debt settlement, including how much you are willing or able to pay.
- Prepare to negotiate with your creditors. You should have the details of your debt handy and create a script so you don’t forget your talking points for negotiations.
- Contact your creditors to discuss potential settlements.
How to pay off credit card debt if negotiating a settlement isn’t the right fit
Debt relief may not be for you if you don’t have thousands of dollars in debt or several late payments. But one of these debt repayment strategies might work instead:
Reworking your budget
Maybe you have relatively little debt, but you’d like to repay it fast to save on interest. If that’s the case, consider reorganizing your monthly budget. Review your non-essential spending, and determine how you can reallocate funds to prioritize paying off debt. If you have multiple debts, you can also use the debt snowball or avalanche methods to help you decide which accounts to focus on first, whether it’s the ones with the smallest balance or highest interest rate.
Debt consolidation
If you have high-interest debt and rising interest charges are making it difficult to keep up, debt consolidation could be another option. This path is generally best for people with good or excellent credit, as better credit increases your likelihood of not only getting approved for a loan or credit line but of getting a lower interest rate.
Consider consolidating your debt with a personal loan or a balance transfer credit card. The former offers relatively low interest and a set repayment term, often up to five years. With a balance transfer, you can get a 0% introductory interest rate for several months. After that, the card’s regular APR applies.
Working with a credit counselor
If you’re able to repay your balances without settling but you still want some outside help getting a handle on your debt, working with a nonprofit credit counselor could be a good alternative. Credit counseling organizations can help you understand your debt, create a road map for repayment and develop better financial habits.
When you work with a credit counselor, they’ll look at your income, debt and monthly expenses as a first step. Then, they’ll recommend a course of action based on your financial situation. The course of action might include a debt management plan, where the counselor tries to negotiate with your creditors to reduce your interest rates or waive fees. (Note that they don’t negotiate down your balance.) While these groups charge monthly fees for debt management plans, they are often lower than what you’d pay for debt relief.
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