What is debt relief? Understanding your options
If you’re feeling overwhelmed by debt, you have options. Debt relief may involve consolidating your debts into a more manageable payment, or exploring options to have your debts reduced or forgiven.
6 min read
You may feel overwhelmed by the bills and expenses you have to pay each month. Many of us have been there at some point. Stack credit-card and loan balances atop normal expenses like rent, internet, and utilities, and the monthly payments can begin to feel insurmountable. If you’re struggling with debt, you may consider debt relief as an option to help lighten the load.
“Debt relief” is oftentimes used as a catch-all term to describe a number of different options for reducing debt. Not all of these options apply to everyone’s situation, and some of them may be a better or worse fit for your individual situation. But if you find the right type of debt relief, it can give you the help and breathing room necessary to get back on track.
In this article, we take a deeper look at debt relief—including the various types of relief programs available and whether they may fit your individual situation. We’ll also look at ways to better cope with debt.
How does debt relief work?
Debt relief is a way to decrease or refinance debt to make it easier to repay. There are many different types of debt relief, and not all of them are made equal.
Certain types of debt relief may involve a creditor forgiving a portion of the debt, agreeing to a lower interest rate, or converging several debts into one. Many companies and consumers often turn to debt-relief options to avoid unfavorable outcomes like bankruptcy.
Again, some of these options aren’t right for everyone—and it’s not a given that everyone qualifies. If you’re concerned that you may continue to rack up more debt even if you do get some relief from your current debts, you may need to think about how to change your spending habits in a more sustainable way.
With that said, debt relief may be an option to consider if you:
- Have fallen far behind on credit card bills or other payments.
- Are making your monthly payments but see no end in sight.
- Feel unable to manage your debts on your own.
- Have contemplated filing for bankruptcy.
What are debt relief companies and how do they work?
Certain debt relief companies may also be referred to as “debt settlement companies.” This makes sense because their primary objective is to settle debts, typically by negotiating directly with creditors. These companies often argue that, without a settlement (e.g. an agreement to reduce payments), the borrower might be unable to repay a debt.
Of course, debt settlement companies are typically in the business of making money, so you may find that they’ll charge a percentage of what you owe (and possibly service fees, too). In certain cases, if the company is unsuccessful in the settlement, the borrower may not have to pay.
Debt settlement isn’t always a straightforward process, and you may encounter several complexities and drawbacks if you explore this route. For one, creditors may not agree to settle. Debt settlement also comes with a risk of being scammed by an unreputable company, and the fees involved may be too high to bear.
Some debt relief companies and organizations specialize in handling clients with more manageable debt issues. They may inspect your debt, advise you on financial management, and negotiate with your creditors on a revised payment schedule. They may also be able to help you create a debt repayment plan that fits your life.
5 types of debt relief to consider
Debt relief is generally not a one-size-fits-all solution. Whether a certain option is right for you depends on several factors—including the amount of money you owe and the interest rates on your outstanding loans.
Let’s look at five typical options for debt relief:
Debt consolidation is a debt-relief tactic that involves combining multiple debts into one. This is usually done by opening up a new loan and using the funds from that loan to pay off existing debts. Not only does this simplify your finances, but it can actually save you money if your new loan has a lower interest rate than the loans you plan to consolidate.
Often, debt consolidation can be done with little or no added interest if you manage to secure favorable terms for your new loan. But if you don't qualify for reasonable interest rates, it may not be an ideal route for you.
Debt counseling and credit counseling
The credit counseling route is generally for people who have manageable debt and are willing or able to work on their spending habits. In a typical case, you will meet with a credit counselor to chat about your budget, debt, and finances. They may take a deeper look into your spending habits and debt to help you come up with a plan to manage your finances independently. In some cases, nonprofit credit counseling agencies may offer these services for free.
Debt management plans
A typical debt management plan (DMP) allows you to pick which debts to register within a program. Usually, you will make one monthly payment that’s spread among your creditors according to the plan's terms. One potential benefit of a DMP is that you may not need to take out a loan to make this one payment. You may also receive more favorable interest rates.
If you can successfully settle your debt, you may save money by paying less than the entire balance you owe.
The downside is that settlement isn't always successful, and it can be an expensive project as you typically have to pay a percentage of your debt to the company handling the settlement for you. Also, you should take into account any potential impact on your credit.
Creditors oftentimes consider this a last resort. Your creditor can agree to cancel your remaining debt, though there’s no guarantee that they will.
You may be able to negotiate some kind of debt forgiveness on your own, if you have cash available to make a lump-sum payment. If not, a debt relief company may help for a fee. If debt forgiveness sounds too good to be true, it may have serious drawbacks to consider. For one, it could have a negative impact on your credit.
How to cope with debt
Life happens, and loans and other forms of debt can easily get out of hand. But the first step to regaining control of your finances is to take a realistic appraisal of what you owe.
Creating a detailed budget can help you understand how much money you can set aside each month to pay down debt. It can also help you understand where your money is going each month, and help you cut down on non-essentials.
A few other tips and points to remember if you’re struggling to make debt payments:
- Contact creditors as soon as you know you cannot make a payment. The hope here is that they will work with you to modify your payment plan, so it's more manageable for you.
- Your secured debts may be tied to an asset like your car or house. If you can't make a payment, your creditor may have the right to take that asset.
- Contact a debt relief service or a credit counseling organization for advice. They have expertise in this area and can advise you on your best options.
The bank you'll love
Manage your finances with N26
At N26, we strive to make saving and budgeting easy. You can create sub-accounts for all your goals and set money aside easily in the N26 app with Spaces. And our budgeting tools allow you to set daily spending limits and track your payments in real time.
Love your bank
Related articlesThese might also interest you
Visa and Mastercard are the world’s best-known credit cards, and it might seem like they’re one and the same. But there are some major differences—read on to learn what they are!
Offshore bank accounts used to get a bad rap, but in fact, they’re regular bank accounts — just located outside your home country. Learn what an offshore account is and how to open one.
A debt management plan (DMP) can help you manage overwhelming bills and take control of your debt. If your debt is getting out of hand, a DMP may be a good option.