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How does debt relief work?

Debt relief options can vary depending on your unique situation and financial need.  Getty Images/iStockphoto

More than eight out of every 10 Americans have a credit card, according to the United States Federal Reserve. So, it's more likely than not that you have one of these plastic cards in your wallet. 

Unfortunately, however, many people who carry credit cards also struggle with credit card debt. After all, it's very easy to swipe a card and lose track of how much money you're spending. And, between the ease of spending on credit cards and the high interest rates that typically come attached to them, it's easy to end up with more debt than you can afford. 

That's where debt relief services come in. These services can often help you reduce the interest you pay on your debt, or in some cases, get a percentage of your balance written off, significantly reducing the amount of time you're in debt and the money you spend getting out of it. But how exactly does debt relief work? 

Learn more about enrolling in a debt relief service today

How does debt relief work

Debt relief typically involves one of three solutions: a debt consolidation loan, a debt consolidation program or a debt settlement program. Each solution is unique and geared more toward a certain subset of borrowers.

  • Debt consolidation loan: Debt consolidation loans are typically best for borrowers who have a strong credit score and overall application. Moreover, those seeking debt consolidation loans are usually looking for a faster way to get out of debt but may not be struggling to make their payments — though a debt consolidation loan typically comes with a lower interest rate than credit card debt. 
  • Debt consolidation program: Debt consolidation programs are typically best for those who are struggling to make their minimum payments. These programs often result in significant interest and minimum payment reductions. 
  • Debt settlement program: Debt settlement programs are usually best for borrowers on the verge of bankruptcy. In most cases, these programs reduce the overall amount of money owed to your creditors.    

Debt consolidation loan

Debt consolidation loans offer "a viable solution by combining multiple debts into a single, more manageable loan with a lower interest rate," says Jordan Mangaliman, CEO of Goldline Financial Services. "This simplifies financial management as well as reduces the overall interest burden, potentially helping individuals pay off their debts more effectively."

Debt consolidation loans can be attractive options because they typically come with lower interest rates and fixed terms — and that could allow you to pay your debts off faster. However, if you take the debt consolidation loan route, Mangaliman says that it's "crucial" to "commit to responsible financial habits and avoid accumulating new debts."

Explore the debt relief options you need today

Debt consolidation program

With a debt consolidation program, experts negotiate interest rates and payment terms with your lenders on your behalf. This typically results in significantly lower interest rates and minimum payments along with a clear path to payoff. However, it also will likely result in your credit cards being closed — which could have a temporary negative impact on your credit score. 

Once negotiations are complete, you'll make one lump sum monthly payment for your debts to your debt consolidation company. When they receive the payment, they'll make individual payments to your creditors on your behalf based on the terms they've negotiated for you. 

As long as you work with a reputable company, a debt consolidation program could save you thousands of dollars in interest and get you out of debt years faster than you would likely get out of it on your own. 

Debt settlement/negotiation

When you sign up for a debt settlement program, you immediately stop making payments to your creditors. Instead, you make a single, more affordable payment to the debt settlement company. 

The debt settlement company reaches out to your creditors on your behalf — letting them know that you're saving for a settlement. Once you have enough money saved, the debt settlement company negotiates the total amount you owe to your creditors. In the end, you typically pay a percentage of what you owe and the lenders write the rest of the debt off as a loss

"Debt settlement may be a suitable option for individuals facing extreme financial hardship and unable to meet their debt obligations," says Mangaliman. "In situations where the risk of bankruptcy is high, debt settlement allows individuals to negotiate with creditors to settle their debts for a lower amount."

However, Mangaliman says that "while this can provide a path to debt relief, it's essential to be aware of potential negative consequences. Those consequences may include "a temporary impact on credit scores and the possibility of tax implications for forgiven debt."

The bottom line

There are multiple types of debt relief available, each designed for varying degrees of debt and financial hardship. So, if you feel like you're overwhelmed with your debt, it's time to make a change. Take your first step toward debt relief today

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