Depending on who you owe, there are several ways to get debt relief. If it’s secured debt, the consumer can take out a loan, also known as debt consolidation loan, to pay off all your debts in one payment. This is not advisable for consumers with very poor credit score as it would make it impossible for them to obtain a loan with good terms and interest rates. Loans on poor credit standing tend to have high interest rates which may just add to the consumer’s debts in the long run, if they’re unable to pay in full, on time.
For unsecured debts, there are two options, depending on the account status and overall amount.
Consumers can opt for credit counseling if their account is still current and the amount is not that huge. Credit counseling can teach consumers how to go about debt elimination for free and without entering a financial program. However, if it’s determined that the consumer’s financial situation need more than just earning more and being careful with finances, they are going to be encouraged to sign up for a Debt Management Plan (DMP) where their debts are going to be handled by debt negotiators.
Debt negotiation can be done d.i.y., meaning the consumer can do it themselves, if they are up to it and have the know-how. Otherwise, they can sign up for a DMP or a debt settlement.
What’s a DMP? It’s a program that negotiates the interest rates. Many consumers are not aware that creditors have what is called a “hardship program” in which, if it’s determined that the consumer is willing to pay the original amount owed, they are going to help out by modifying the interest rates. One example of this modification is the creditors can freeze the interest rates for a time, so the consumer can pay for the principal amount of debt. There are other modifications depending on the creditor and the consumer’s financial situation. Again, the consumer can do it themselves but, if they can’t, there’s the DMP, which would cost $25/month for three to five years.
The other debt relief option is debt settlement. Debt settlement negotiates the entire balance down to more or less half. This is not the same with DMP, because in DMP, it’s the interest rates that are being negotiated. Another difference between the two is the enrollment requirement. Debt settlement requires for the total debt amount to be $10,000 or more and the accounts past due or nearing it.
In a DMP, creditors are willing to negotiate, but only the interest rates because the total debt amount is not that high and the accounts are still current, meaning – the consumer can afford to pay. They just need help.
In a debt settlement, consumers are in a really tight financial situation, hence they defaulted for several months (5 months or more) – meaning, they cannot pay anymore. When accounts reach non-payment for that period of time, the creditors are forced to write-off the debt to the IRS, and they lose profit.
What they do to recover at least a portion of the amount owed, is endorse the charged-off account to a third party collector, where it’s understood that the value of the account is at least 25% lower than its original value.
Here’s where debt settlement comes in. Debt settlement can pull the amount owed down to 30% of the original amount – depending on the case. The consumer can be debt free in a debt settlement program in less than three years. How much does it cost?
Just recently, debt settlement companies are no longer allowed to ask for upfront fees, until a debt is settled. The industry standard rate is 15% of the total debt amount or 20-25% of the settlement amount – payable only when a debt is settled.
