What is Debt Relief, and How Does It Work?
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- By Greg Brown
- Feb 20, 2023
Forgiving debt is a global phenomenon, from single credit cards to billions in government relief. Debt forgiveness has been part of the narrative for generations. Personal debt relief was mentioned as far back as the Bible’s Book Of Leviticus, with French kings of the 13th Century having their government debt forgiven.
Overwhelming debt can become toxic to people who fail to deal with the burden. Toxic debt has a low chance of being paid off and could impose physical harm on the person holding the debt. Toxic loans are also harmful to the lender because there is little chance of the loan being paid, and the account must be charged off.
Debt relief programs are not for everyone, and anyone taking advantage of the programs available must understand the consequences. Debt relief, such as bankruptcy, erases all debt but plays havoc on a credit score. Contacting creditors to lower your interest rate and payment sounds simple, but it is always improbable for success.
The first thing to do is understand your income and debts, then make a plan.
Overwhelming debt can ruin a family’s future, with interest mounting and income stagnant. The good news; there are alternative means of paying off insurmountable debt. The key is a changing mindset and getting a clear picture of your finances.
Committing yourself to paying off debt comes with sacrifice. However, there are plenty of ways to pay down debt if you look at your finances from every angle. Consider a home equity loan if a large amount of debt needs to be paid.
If credit card and personal loan debt have gotten out of control, it may be time to talk with creditors and renegotiate your balance. Depending on the creditor, renegotiating may or may not work. If they feel the only way to get paid back is to renegotiate, the lender will listen. Otherwise, expect to pay the total balance. Consider taking on a side gig to raise additional funds, and god forbid, ask relatives for money if you are desperate.
Debt consolidation loans are another option if a considerable amount of debt needs to be paid quickly. Before signing on the bottom line, ensure you save enough interest to make the loan feasible. Good credit files and income will be needed for drastic measures such as home equity and debt consolidation.
5 Tips to Deal with Aggressive Debt
Trim the Budget: Finding more money to pay off debt seems an endless cycle for most people. However, the sacrifices are worth the trouble once that last credit card has been paid. Take a hard look at every dollar of income and expenses and find areas where spending can be cut, and money can go to debt. Trim any expense for a few weeks or months, with the extra cash going to your debt.
Avalanche Repayment: Consider restructuring your debt by first paying off the card or loan with the highest interest rate. Make minimum payments on all the other debt while paying as much as possible on the high-interest debt. Once that first debt is paid in full, continue the avalanche repayment on the next highest-interest debt until all are paid.
Pay More Than the Minimum: Reduce debt and save significant interest by paying as much as possible with each payment. Paying credit card minimums can take years to pay off; add additional charges, and they can never be paid in full. Find areas in the budget that can be trimmed, allowing you to pay high-interest bills early.
Snowball Your Debt: Like the Avalanche Repayment plan, snowballing starts with the lowest balance cards or loans. If there are a lot of cards with minimum balances, paying them off quickly frees up cash for other debt.
Balance Transfer Cards: If your credit file is still intact, plenty of zero-interest credit card offers should come in. Consider transferring high-interest loans to a zero-interest account. With no interest accruing, this may allow you to pay off balances more quickly. Make sure the fine print does not include transfer fees.
Government Debt Relief
Unfortunately, the US Government does not offer direct-to-consumer debt relief programs. Active duty military members may qualify for low-interest mortgage and credit card loans through the Servicemembers Civil Relief Act (SCRA). Under this program, military members can get protection from eviction and delay court proceedings, including bankruptcy, foreclosure, and divorce.
For some borrowers, the debt collection process is a nightmare. Before the Fair Debt Collection Practices Act, debt collection companies operated with no oversight and used cruel and abusive tactics. Debt collectors can no longer use obscene or abusive language by order of the Congress of the United States. To report harassment by a debt collection agency, submit your claim here.
Off Limits for Debt Collectors:
- Contact you at inconvenient times
- Communicate at your work if you tell them your employer disapproves
- Communicate with your friends
- Harassment with repeated calls and profane language
- False claims you will be arrested
- Threaten you with claims your bank accounts will be taken
Credit Card Debt
Debt collection has severe repercussions on your credit report. The collection is a negative item meaning the original creditor has written off the account, and the debt has been sent to a collection agency. The statute of limitations for most credit card debt is between three and six years, with some states going as high as fifteen years.
The statute of limitations should not be considered a get-out-of-jail-free card by consumers. The debt is still owed, and collection agencies have a right to pursue a consumer. However, the agency must still abide by the FDCPA.
Consumers need to understand debt relief and what laws are on their side. Debt relief has many turns for a consumer, depending on the amount of debt built up over a lifetime. It is wise to keep control of debt and always know your options.