Emergency Debt Relief: When to Consider It (2024)

FAQs

When should you consider a debt relief program? ›

For example, you may need credit card debt relief if you're struggling to pay off credit card bills. Or you may be interested in debt consolidation if you have several types of debt to pay off. Credit counseling, debt management plans and debt settlement also fall under the debt relief umbrella.

Cons of debt settlement

Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.

The bottom line

Credit card debt forgiveness usually takes anywhere from two to four years on average. However, that time frame may vary depending on the amount of debt you owe, how much money you can afford to pay per month and the company you work with.

You'll typically need good credit and income to take out a debt consolidation loan or balance transfer credit card, for example, while most debt settlement companies require you to enroll at least $7,500 or $10,000 of debt to qualify.

You can't make any new charges on your existing accounts or get new credit cards until you complete the program. But you can get out of debt faster with total payments that are up to 50 percent less.

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.

Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you. Unless the debt settlement company settles all or most of your debts, the built-up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.

Downsides of debt forgiveness

Debt forgiveness may negatively affect credit scores, making it challenging to obtain future loans or credit. Forgiven debt of more than $600 may be considered taxable income, potentially resulting in a hefty tax bill.

Credit score impact: Debt settlement can negatively impact your credit score, as settled accounts may be reported as “settled” or “charged-off.” A debt settlement may remain on your credit report for up to seven years.

Debt consolidation is generally considered a less damaging option for your credit. It may be a better choice for those with good credit who can qualify for a lower interest rate.

What is the lowest a creditor will settle for? ›

Depending on the situation, debt settlement offers might range from 10% to 80% of what you owe.

How Long After a Debt Settlement Can You Buy a House? There's no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender's requirements on the issues raised above (credit score, DTI, employment and down payment).

While there are no government debt relief grants, there is free money to pay other bills, which should lead to paying off debt because it frees up funds. The biggest grant the government offers may be housing vouchers for those who qualify.

If you received a Pell Grant in college and meet the income threshold, you will be eligible for up to $20,000 in debt relief. If you did not receive a Pell Grant in college and meet the income threshold, you will be eligible for up to $10,000 in debt relief.

Canceling runaway interest for millions of borrowers

President Biden will announce plans that, if finalized as proposed, would cancel up to $20,000 of the amount a borrower's balance has grown due to unpaid interest on their loans after entering repayment, regardless of their income.

Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. "One of the biggest advantages of going through a debt relief program is the savings.

Debt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose.

What Percentage Should You Offer to Settle Debt? Consider starting debt settlement negotiations by offering to pay a lump sum of 25% or 30% of your outstanding balance in exchange for debt forgiveness. However, expect the creditor to counter with a request for a greater amount.

Debt relief through a debt management plan

A debt management plan allows you to pay your unsecured debts — typically credit cards — in full, but often at a reduced interest rate or with fees waived. You make a single payment each month to a credit counseling agency, which distributes it among your creditors.