How Does Debt Relief Work?

If debt is weighing you down and you are ready to be free of all the stress and worry that come with it, you may be wondering how debt relief works and thinking about how to explore your debt relief options with ClearOne Advantage.

Exploring your options is the wise thing to do. Here, you can learn about different types of debt relief. You’ll learn:

What is Debt Relief?

Here’s a piece of really good news for you. If you are reading this, you are already taking your first step toward debt relief. Finding out what you can do to get debt help is a positive action that can lead to long-term success.

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The stronger your desire to take control of your debt, the more likely you will be to take appropriate steps to become debt-free. There are just six steps to successful debt resolution.

Taking steps to understand your financial situation can help you decide whether you need professional debt relief or whether you can work your way out of debt by budgeting more carefully and practicing good money management skills.

Types of Debt that Qualify for Debt Relief Programs

When you need debt help, you might want to lump all your debt together into one big bucket and try to handle it that way. The problem with that approach is that debt relief programs are not designed to handle all types of debt.

There are basically two types of debt: unsecured debt and secured debt. Secured debt is debt that is tied to an asset in some way, such as your car or your home. If you miss payments on secured debt, creditors typically have the right to seize the asset that secures the debt in payment.

Unsecured debt is different in that it is not tied to any tangible asset. If you miss payments on unsecured debts, creditors may not be able to collect on the debt easily. This extra level of risk for the lender is why unsecured loans tend to carry higher interest rates than secured ones.

Unsecured Debt Secured Debt
Credit Card Debt Vehicle Debt
Personal Loan Mortgage Loan
Private Student Loan Some Federal Student Loans

 

The most common type of debt handled via a debt relief program is credit card debt. That’s likely because, as a nation, America has approximately $830 billion in credit card debt, a number that has been growing steadily for some time. For many families, mounting credit card debt becomes too much to handle on their own.

How to Get Out of Credit Card Debt: 5 Options to Explore

Once you’ve decided that debt relief is definitely in your future, what options do you have? Here are five options to consider:

  • Debt consolidation loans
  • Balance transfers
  • Debt management plans
  • Bankruptcy
  • Debt settlement plans

Each of these debt relief options is appropriate for certain circumstances, so it pays to look into which one will work best for you. Let’s unpack each one to see what fits your unique situation best. But first, there is one final question you likely want to ask.

How Long Does Debt Relief Take?

The time it takes to get out of debt is dependent on several factors, including, but not limited to:

  • The debt relief option you choose
  • The degree to which you follow the program you choose
  • The level of debt you have

In general, you should plan on spending anywhere from 2 to 5 years to become completely debt-free.

Get a free savings estimate today to see how much you can save.

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What Is a Debt Consolidation Loan and How Does It Work?

Debt consolidation is exactly like it sounds. It is the act of consolidating your debt, or rolling your debt all up into a single liability. It is a way to streamline your debt rather than getting rid of it.

If you have a great credit score, you may be able to get a debt consolidation loan with a low, fixed rate that will cost you less in the long run than you are currently paying on variable-rate credit cards that may have a higher interest rate at present.

However, it is important to note that not all people qualify for a low interest rate debt consolidation loan. In some cases, choosing a debt consolidation loan may cost more in the long run than it saves.

Another potential danger of debt consolidation loans is that they may be secured loans. Some borrowers choose a secured loan because they can get a much lower interest rate than they are paying on their current credit cards. However, in this process, they are using their home or car to secure the loan. What happens if they are unable to keep up with payments? Then, their car or home may also be lost.

As a general rule, debt consolidation loans are only recommended for people who:

  1. Have excellent credit scores.
  2. Have a healthy debt-to-income ratio.
  3. Have a lot of willpower to change their spending habits and stay out of debt once their initial debt load is paid.

Pros of Debt Consolidation

  • Simplifies debt repayment
  • Enables monthly savings through reduced interest
  • Eliminates high, variable-rate interest

Cons of Debt Consolidation

  • Requires an excellent credit score for best rates
  • Loan may be secured, which increases the risk of losing other assets
  • Requires considerable willpower to avoid overspending

How Does a Balance Transfer Work?

If you don’t want to run the risk of getting a secured loan to consolidate your debt, you may be thinking of a balance transfer for credit card consolidation instead.

Here’s what you should know about balance transfers and debt relief. Using a balance transfer is, in reality, just paying off one credit card with another credit card. So, ultimately, you will need to address the larger problem of how to exercise good financial discipline to make a balance transfer really work in your favor.

That said, there are some circumstances in which a balance transfer may work. Here are the things that must be true for a balance transfer to be a good deal for debt relief:

  • You have to qualify for the balance transfer. (Not everyone does.)
  • You have to find a balance transfer card that has a lower interest rate than the card you currently have. (Pro tip: Aim for one with a 0% interest rate, if possible.)
  • You have to find a card with a payment you can afford.

Assuming you can find a card that meets those criteria, a balance transfer may be an option for you. Here’s a look at a scenario in which a balance transfer could work.

Suppose you have two credit cards. On card one, you owe $5,000 and your APR is 16.49%. On card two, you owe $4,500 and your APR is 18.49%. You have excellent credit and you find a balance transfer offer with an introductory APR of 0% for 12 months and 16.49% thereafter. The card provider will charge a 3% transfer fee upfront. Is this a good deal?

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(Source: Motley Fool)

By transferring your credit card balances and not charging anything else to your credit cards, you can save an extra $1,372 over the next 12 months and then save $7 per month after the introductory period ends.

Sounds good, right? It is, with one caveat. It only works like that if you do not continue to use your credit cards, either for purchases or for cash advances.

If you can stop making purchases on your credit cards completely, this balance transfer option may help you get out of debt. It does not, however, reduce the total amount you owe. It may simply help you pay down your debt by reducing the interest that you pay over time.

What Is Debt Management and How Does It Work?

Another debt relief option to consider is debt management, also known as credit counseling. With debt management, you work with a credit counseling agency to get out of debt. Basically, you hand over the management of your debt to the credit counseling agency and the agency deals directly with your creditors.

The credit counseling agency consolidates your debts into one single, lower-cost bundle with the aim of getting you reduced interest rates and penalty forgiveness from your creditors. The credit counseling agency does not work to reduce the principal amount you owe to your creditors, so this debt relief method does not save you any money in principal payments.

Unlike a debt consolidation loan, however, this method of debt relief does not require that you have an excellent credit score, which makes it more attainable for many people.

When you work with a credit counseling agency, you will be working under a debt management plan (DMP). Typically, your DMP payment is not much lower than what you are already paying to your creditors, but because your interest rates may be lower than they were before, you should be able to pay off your creditors in four or five years.

Pros of DMPs

  • Reduced interest rates and fees
  • No need for excellent credit
  • Small impact on your credit score

Con's of DMPs

  • Upfront fees and monthly fees to pay
  • No ability to open new lines of credit for program duration
  • No debts are completely discharged until the program is successfully concluded

Keep in mind that the credit counseling agency with whom you work will not be negotiating with your creditors to reduce the principal balance you owe. Debt management plans are only a good idea if the following statements hold true:

  • You are working to get rid of only credit card debt.
  • You do not qualify for other forms of debt relief.
  • You earn enough money and have enough discipline to pay your DMP payment on time each month.

How Does Bankruptcy Work?

Bankruptcy is a debt relief option for those who are in dire financial circumstances. The aim of bankruptcy is to give someone in a hopeless financial situation a way to start over. It is a legal process that allows you to repay a portion of your debt or to have your debts forgiven, depending on which type of bankruptcy you file.

In all cases, bankruptcy comes with significant costs and restrictions. Typically, you would choose bankruptcy only if:

Because bankruptcy is considered a drastic method of debt relief that has long-term negative effects on your credit, this method of debt relief should likely be one you would choose only as a last resort.

How Does Debt Settlement Work?

Debt settlement is a debt relief option that involves working with your creditors to create a debt reduction plan. It is different from a debt management plan in that, with debt management, you are still paying your creditors the full amount of your debt. With debt settlement, on the other hand, your creditors are making an agreement with you to accept less than what you owe to them.

You may wonder why creditors would agree to accept less than what you owe. The simple answer is that, when a person is experiencing financial hardship and having real trouble paying bills, creditors are aware that it is quite possible that they will be unable to recoup any money if the person declares bankruptcy. So, to avoid the possibility of getting none of their investment back, your creditors may be willing to negotiate a settlement to ensure they recoup at least some of their money.

That is not to say that creditors will make this decision lightly. For this reason, most people who choose to try debt settlement do so with the help of a debt settlement company that specializes in negotiating with creditors on behalf of their clients.

Here’s how it works:

Call a ClearOne Advantage Certified Debt Specialist at 866-481-1597. During that brief phone call, your debt specialist will learn about your unique debt situation and talk with you about your options for debt settlement. If it seems like a good fit, you will get a savings estimate and customized debt settlement plan that you can review.

Once you decide on which plan fits you best, you will set up an escrow account and begin making payments to the account. Once sufficient funds have accumulated in your escrow account, our skilled negotiators start the process of negotiating with your creditors. And there are no upfront fees to get any of this done.

Although it may sound too good to be true, debt settlement does work. According to a 2020 report commissioned by the American Fair Credit Counsel, total debt settlement program savings average just under $5,800 after fees, and for every $1.00 spent on debt settlement fees, individuals receive an average of $2.67 in debt reduction. The report also revealed the following statistics regarding the success rates of debt settlement programs:

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Debt settlement is the only debt relief option other than bankruptcy that enables you to actually pay less than you currently owe to get out of debt. If you are struggling with a heavy debt load, it is a smart move to consider debt settlement as a viable option.

How to Get Started with Debt Relief

Now that you are aware of your debt relief options, what is your next step? Why not talk with a Certified Debt Specialist who can answer your questions, discuss your unique situation, and design a customized plan to help you get out of debt within 24-60 months? Call 866-481-1597 to get a free savings estimate today.

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The information provided is for informational purposes only and is not intended to provide legal or financial advice. ClearOne Advantage is not a lender, credit repair or consumer credit counseling company. ClearOne Advantage doesn’t provide investment, tax or legal advice. Please consult a certified financial advisor for individual credit and lending advice. Please consult with a bankruptcy attorney for more information on bankruptcy.

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I wish to thank you for all of your agency support and encouragement. The last two months have been very stressful due to the accounts going legal. It has been also very rewarding to get through this process and have a good grip on our future and we have started this planning and example for our children.

- Joseph and Michele, PA