5 important debt relief options to know

With the inflation rate climbing and interest rates remaining elevated, many Americans have found themselves overwhelmed by growing amounts of debt. After all, stubborn inflation has caused the cost of living to soar over the last few years, and essentials like food, housing and energy are further straining household budgets. 

The Federal Reserve has also kept its benchmark rate paused at a 23-year high over the last several months to try and temper inflation. This, in turn, has caused credit card rates to climb, saddling borrowers with higher finance charges that make it increasingly difficult to pay down their balances, placing further strain on many people's budgets.

But while today's economic environment may be causing high-interest debts to compound, the good news is that there are ways to tackle these types of issues. For example, if you're struggling under the weight of mounting credit card debt, there are several debt relief options that may be worth considering. And, understanding the nuances of these solutions may be the key to charting a path back to financial stability. Below, we'll break down what you should know.

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5 important debt relief options to know

If you want to pay off your high-interest credit card debt, the following debt relief options may be worth a look:

Debt management

One of the first lines of defense against overwhelming debt is a debt management program. These plans, typically administered by debt relief companies or agencies, work to negotiate with creditors on the borrower's behalf. The goal of the negotiations is to secure more favorable terms, such as lower interest rates and monthly payments.

The process begins with you working closely with a credit counselor to create a detailed budget and repayment strategy. The counselor then contacts your creditors to propose a debt management plan. If accepted, you make a single monthly payment to the debt relief agency, which then distributes the funds to the various creditors.

The benefits of a debt management program can be substantial. In addition to potentially reducing interest rates and monthly obligations, it can also halt collection calls and late fees. Successful completion of the plan can also help rebuild your credit over time.

However, debt management programs do carry some drawbacks. Participation is typically reported to the credit bureaus, which can temporarily ding your credit score initially. There may also be program fees charged by the debt relief agency. And if you miss payments or withdraw from the plan, you risk losing the negotiated concessions from creditors.

Learn more about how the right debt relief service could benefit you here.

Debt consolidation

Another popular debt relief option is debt consolidation. This approach involves taking out a new loan, typically with a lower interest rate, to pay off multiple existing debts. The goal is to simplify the repayment process and potentially save money on interest charges over the life of the loan.

Debt consolidation loans can come in various forms, including loans that are specifically geared toward debt consolidation. In many cases, personal loans or home equity loans or home equity lines of credit (HELOCs) can also be used for debt consolidation. 

You may have the option to use a debt consolidation program offered by a debt relief service. These programs work by negotiating with creditors on your behalf to secure more favorable terms, such as reduced interest rates and consolidated monthly payments. The service then facilitates the payment process by collecting a single monthly payment from you and distributing it to the creditors.

The primary benefit of a debt consolidation program is the potential for reduced interest charges and simplified repayment. However, these services often charge fees for their assistance, which can eat into the overall savings, so it's important to weigh the pros and cons before enrolling.

Debt settlement 

If you're facing particularly severe debt burdens, more aggressive debt relief options may be necessary. These include debt settlement programs, also known as debt forgiveness programs, which aim to negotiate with creditors to reduce the overall amount owed.

Debt settlement involves working with a debt-relief company to negotiate lump-sum settlements with creditors. The goal is to pay less than the full balance in exchange for a one-time settlement paid on the account, providing you relief from the higher balances you owe.

It's important to note that while this can provide significant savings, it can also have a significant negative impact on your credit score. And, you may have to pay income tax on the amount of debt that's forgiven. In turn, these options should be carefully considered and should typically only be utilized if you're unable to pay off your debt with another debt relief option.

Credit card hardship programs

Some credit card lenders will also offer hardship programs that can provide temporary relief. These programs are designed to assist borrowers facing financial difficulties, such as a job loss or illness.

Under a hardship program, the lender may be willing to reduce interest rates, waive fees or even temporarily suspend payments. This can provide much-needed breathing room for you to get your finances back on track.

However, it's crucial to understand the terms and conditions of any hardship program before enrolling. For example, some lenders may require you to close the credit card account, which can negatively impact your credit score. And, the benefits of the program may be temporary, requiring you to resume regular payments once the hardship period has ended.

Bankruptcy

For those facing overwhelming debt that they simply cannot repay, bankruptcy may be the only viable option. This legal process can provide a fresh start by discharging eligible debts, including credit card balances, medical bills, and personal loans.

There are two primary forms of consumer bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy involves the liquidation of your assets to pay off creditors, while Chapter 13 allows you to restructure your debts and repay a portion of what is owed over a three- to five-year period.

The decision to file for bankruptcy should not be taken lightly, as it can have a significant and long-lasting impact on the consumer's credit report and overall financial well-being. However, if you're facing insurmountable debt, it may be the best path forward to regain financial stability and a secure financial future.

The bottom line

In the face of today's challenging economic climate, it may be more important than ever to understand the various debt relief options available to you. After all, the key is to act quickly and proactively when faced with mounting debt. By exploring these relief options and seeking guidance when necessary, you can take the first steps toward regaining control over your finances and charting a path back to financial stability. With the right strategy and a commitment to responsible debt management, even the most daunting debt burdens can typically be overcome.