Debt is a rising problem in the United States. In 2017, the total amount of household debt held by Americans rose to over $13 trillion. That means the average family is juggling over $131,000 in debt while the median income is less than $60,000 per year. Although mortgage lending and vehicle contracts are a substantial amount of these obligations, the total credit card debts carried in the United States reached $905 billion, with the average amount being over $15,000 per household.
Because there are so many monthly debt obligations on families today, it is no surprise that the number of delinquencies associated with credit card debt (and other loans) being at least 90 days late is on the rise. Since the cost of living has risen by 30% since 2004, total income levels have only gone up 28%. That means the price of essentials, such as food, clothing, and shelter, takes up more of the median income than in past years.
Medical bills have also risen by almost 60% since 2003, creating another new obligation for American families. If a medical emergency arises, it can leave them in a financial situation that is disastrous. A significant majority of the bankruptcies which occur each year in the U.S. are because of hospital bills and other medical expenses.
List of the Pros of Debt Relief Programs
1. These programs can help you to get out of debt in a specific amount of time. Debt relief programs are a form of creditor settlement. You will pay back a debt in multiple payments that is typically much less than what you actually owe. The structure of most programs will have you stop paying your creditors until you have saved a specific amount of money. Then you contact them to negotiate paying back the debt in a couple of payments that is much lower than the total amount. Most programs can even structure monthly payments that are affordable to help you get rid of that debt without negatively impacting your current finances.
2. Representatives of the debt relief program negotiate on your behalf. Many people find it difficult to negotiate with their creditors because the first answer they receive is typically not the one they want. It is an ongoing process where failure is always a possibility. When you start working with a debt relief program, then you will gain access to a group of experienced negotiators who have the expertise in dropping the total amount of money that you owe. This advantage takes a lot of the hassle and frustration out of a challenging and stressful situation.
Because most debt relief programs are also working with a lot of debt for different accounts, this option gives them more leverage with creditors because they can offer bulk deals for multiple accounts. That means you can often receive a better settlement through a program instead of trying to manage it on your own.
3. Debt relief programs create a structure plan for you. Following a specific debt relief plan that you create by yourself requires strategy and discipline. There are some households who can make this happen without any help. For those who are in a significant amount of debt, their inability to manage monthly payments could be part of the reason why they got into this situation in the first place. It can be challenging to figure out a repayment process, stick to a strict savings schedule, and decide on the debts to settle first.
When your application for debt relief is approved by one of these programs, then all of this work is handled on your behalf. You will pay the agency who helped you to negotiate the lower amounts, and then they will send the funds to your creditors.
4. You can apply for credit again after completing the program. The action of applying to a debt relief program does not impact your credit score at all. It is the actions taken by your creditors in response to the negotiations that occur which can have an adverse impact. Some households and individuals can actually see their credit score rise some because of the changing structures of their debt. Although your accounts will close, getting through the repayment process can help you to apply for new credit once you become free of your unsecured debt.
It is essential to remember that you must make every payment on-time for this program to work. Then choose an option that is accredited by the Financial Counseling Association of America or the National Foundation for Credit Counseling and understand the fees and potential alternatives you may have.
5. Debt relief programs can stop the creditor phone calls. If you have ever been in debt before, then the phone calls you receive can become a daily headache. You will find collection agencies calling you at home, at work, and every other number that they have for you. Even if you try to block their number, they have tools available that can work around that option. Many people decide to keep their phones off to manage this issue.
Then there are the emails that happen too. You’ll find requests to make monthly payments in your inbox if you get behind on your debt from some creditors. When you enroll in a debt relief program, then these problems can start to go away. They’ll handle the calls because they are working on settling your debt. When this stressor goes away, a lot of relief is felt because it seems like there is finally a light at the end of the tunnel.
List of the Cons of Debt Relief Programs
1. Not everyone will qualify for a debt relief program. There is usually a minimum amount of debt necessary for an individual or household to qualify for a debt relief program. This option is usually meant to manage a larger amount of debt since a creditor is unlikely to settle on smaller amounts that could be paid off in a short time. You typically need to carry unsecured loans to take advantage of this option as well, which means your federal student loan obligations will not qualify for this service. Mortgages and vehicle loans are typically exempt as well.
If you have private student loans, medical debt, and significant credit card debt, then these are all accepted by a debt relief program. Some personal loans also qualify. Each application is taken on a case-by-case basis.
2. It may not help your credit score to be in a debt relief program. When you enroll in a debt relief program, then you are allowing this organization to negotiate on your behalf with your creditors. They will hammer out a deal that allows you to settle your debt for less than the total amount owed. Then a monthly payment structure is given to you that will help you to pay off the negotiated settlement in a specific time period, usually between 1 to 4 years for most debts (but sometimes longer). When you repay this amount, your credit record will typically say “settled in full” instead of “paid in full,” which can impact your overall credit score.
It is not unusual for your credit cards and personal loans to close any active credit you may have as part of this process too. That means you would no longer be able to make purchases or submit financing options through the issuer or lender, even after you take care of the debt. Closing several accounts at once can also have a significantly adverse impact on your credit score.
3. You must keep track of your payment progress. Because most debt relief programs require that you send them the money rather than giving it directly to your creditors, it is up to you to ensure that the funds are being allocated appropriately. Although a vast majority of these agencies will do exactly what they say the can do on your behalf, it only takes one bad program to create a significant financial headache for you. It is helpful to independently verify that the settlement is as the agency says it is, and then periodically verify that the creditor receives payments according to the schedule that you negotiated with the debt relief program.
4. Not everyone should try to use a debt relief program. It cannot be stated enough: debt relief is not an easy fix for a difficult situation. This process is not pain-free. If you can repay what you own through some basic changes in the way that you spend money, then you should take that option first. You should only consider debt settlement or management if you want to avoid a bankruptcy and the following also applies.
There is no hope of repaying your unsecured debt in the next five years even if you take extreme financial measures to do so.
The total amount of your unpaid unsecured debt equals 50% or more of your total gross income.
Your gross income is what you earn before taxes and other withholdings come out of it. If you currently earn $5,000 per month as a household ($60,000 per year), then you would consider this option if your total unsecured debt is $30,000 or more.
5. Debt relief programs cannot always help individuals or households avoid bankruptcy. Many people do their best to stay out of bankruptcy because of the severe restrictions to credit that it will cause. This adverse action stays on your credit record for 7-10 years, and it can hamper any financing options you may need during that time. In the first years of a bankruptcy, it may be almost impossible to secure a mortgage or a loan on a new vehicle.
There is little point in entering in a settlement or management plan for your debt if the monthly amount requested is not something you can afford to pay. That is why you may wish to consult with an experienced bankruptcy attorney first before trying to pursue this strategy.
6. These programs are not free. Although there are non-profit debt relief programs that do not charge as much as a for-profit agency, you will discover that there are costs associated with this solution. You will still come out ahead at the end of the day, but the fees can be extensive if you have a lot of debt. Most companies will charge you a percentage of the debt that it is settling, which can be as high as 25%. That is why there are balance minimums in place for this program (in addition to the fact that creditors won’t usually settle on small amounts).
Let’s say that you have $50,000 in medical bills and credit card debt that you want to settle through a debt relief program. If the agency you choose charges a 20% fee, then you will be paying them $10,000. If the program can settle that amount for you at $15,000, then tack on the $10,000 in costs, and you just saved 50% on your debt. If you did that work yourself, you would then save another $10k.
7. Delinquent accounts will continue to add late fees and interests. Your debt balance with a creditor will keep increasing until a final settlement is reached through the debt relief program. That means there will be more to pay in late fees and interest on the amount you owe. Even if you continue to make the minimum payment (which is strongly recommended), the actual amount that becomes your structured debt in this program can be significantly more than you think it will be. That is why it is imperative to reduce the chances that additional costs will tack onto the eventual bill you owe whenever possible.
That means you might be paying more each month thanks to the management fees of the debt relief program and the minimum due to your creditors until they reach a settlement on your behalf. The amount in question could be more than you can afford to pay.
8. You might owe significantly more on your taxes. When you have debt that is forgiven by a creditor in the United States, then the amount in question is sometimes considered to be taxable income by the Internal Revenue Service. The only exception to this disadvantage is if you are entirely insolvent, which means the total amount of your debt is superior to the entire number of assets you hold. Because insolvency is challenging to determine, you may need to hire a tax professional to see if you will need to pay these taxes. If you have a substantial amount forgiven ($25,000 or more), there is a good chance that your income levels for the next tax year may be in a higher bracket. Even if you only pay 12%, that’s more than $2,500 you’ll be paying the tax man come April 15. You may wish to be proactive in setting up a payment plan with the IRS to avoid financial complications in that area.
9. Creditors can still sue you for the balanced owed in many instances. Even if you are working with a debt relief program, there is nothing in place legally that prevents your creditors from filing a debt collection lawsuit against you. This disadvantage may not apply if your debt is of a certain age, which is between 5-7 years in most states, where a time lock occurs against legal proceedings. Most programs will say that their goal is to complete the progress as fast as possible to avoid any lawsuits, but there is no guarantee that the creditor won’t come after you for the full amount.
It may be helpful to get a settlement agreement with your creditor in writing about the amount you owe. Have a stipulation included that a lawsuit will not occur while you make your monthly payments. Then make sure that each payment is made on time.
10. It only takes one missed payment to start back at square one. Debt relief programs only work when you can make a payment on time, every time while trying to take care of your obligations. If you miss one payment, even by only a day, then that can be enough to take you out of the program permanently. When that happens, you will likely lose your settlement benefits as well, which means the full balance is owed again. Falling out of the program (which most people actually do) also means that you may be ineligible to apply for another one.
It is essential to remember that a lender is not obligated to accept a settlement offer, even if a debt relief program is working as your representative. Some creditors refuse to work with these agencies.
11. Some debt relief programs require certified funds. This disadvantage is where you must be careful when choosing a debt relief program to help work with your creditors. The monthly payments that some agencies require must be certified in some way. That means you must give them cash, send a cashier’s check, or wire them funds directly. You may not be able to send an ACH transactions or pay with a debit card. Because you are working with certified money, there isn’t much that you can do if the funds are not given to your creditor. It will just be gone. That is why you must perform your due diligence before deciding on which program to use to ensure that you won’t be stuck with even more debt in the months ahead.
One More Consideration for the Pros and Cons of Debt Relief Programs
Debt does not usually happen by accident. Although there may be medical bills or unexpected expenses from emergencies, households get into trouble because they are not in a position to save some money back each month. Some people use their credit cards irresponsibly. You might have purchased a home that was too large for you, and now the mortgage obligations make it challenging to pay off your other expenses.
There are times when you might get laid off from work and the unemployment doesn’t cover everything. You might have substantial repair bills for your home or vehicle. Rather than offer blame, the idea here is to find a solution if one is possible.
The pros and cons of debt relief programs provide an opportunity to help you find the relief you need. It doesn’t require that you go into more debt to get rid of the old stuff, but it will make you give up your credit cards and other forms of lending in most situations until you get out of debt. If there are other options available for you, then you should try them first. When bankruptcy seems to be your only other option, then that is the perfect time to consider this option.