What is debt relief? Debt relief or debt cancellation is the partial or total forgiveness of debt for those individuals who have encountered financial hardship, such as job loss, disability or any legitimate reason that has caused them to fall behind on their bills, credit card payments and loans. Debt relief is not for those looking for the easy way out or for those looking to defraud their creditors.

Debt relief programs have been around for many years and continue to evolve based on the changing economy of the American people.

Statistics

Experian completed their statistics for 2017 and the results are as follows -

• The average credit score in 2017 was 675 (up 2 points from 2016)
• Each family holds an average of 3.1 credit cards with a balance per card of $6,354
• Each family holds an average of 2.5 retail cards with a balance per card of $1,841
• The average mortgage debt held per family is $201,811
• Average non-mortgage debt (personal loans, student loans etc) is $24,706
• 1/3 of America's 44 million student loan borrowers say they have been late at least once in the previous 12 months
• The average credit line for subprime borrowers is at $33,371 adding to the risk of delinquencies
• As of 2017, the average student loan balance has risen to a new record high of $34,144

The economy is picking up - credit card balances are up, but according to the Federal Reserve Bank of New York wages have remained relatively flat. Are they up due to the fact families have more 'free' cash to spend, or are credit cards being used to pick up the difference between wages and expenses. A Pew (an independent nonprofit organization that uses evidence-based, non-partisan analysis to educate and helps solve today's challenges) study found that just 46% of Americans earn more than they spend every month. This means that for 51% of all American families they are going backward financially every month. If they get sick, lose their job, have an unexpected expense, it is very easy to fall further and further behind each month. The New York Federal Reserve reported that household debt has reached a new peak for the first quarter of 2018. On the other hand, credit card debt has decreased by 2.3 percent overall.

You continue to go backward every month, you fall further and further behind, someone is sick or loses their job. You carry large balances on your credit cards and finally are unable to make even the minimum requirement. The creditors are calling every day and then several times a day. There is nothing you can do and quite honestly you don't know what to do. Your credit score drops constantly to the point of almost no return. You are now faced with either filing for Chapter 13 bankruptcy or calling a debt relief company.

Benefits of Debt Relief

There are a few ways to achieve debt relief. They range from debt settlement (or debt negotiation), consumer credit counseling, balance transfers, applying for a debt consolidation loan and as mentioned above, filing for bankruptcy.

• Credit Counselling - You can find free or low-cost credit counseling at your local credit union, non-profit organizations and even your local church. They will direct you to different resources to help you solve your money issues. They may direct you to a class on money management, help you create a budget (what you earn and how you spend your hard-earned money) They will help you make a plan that works for you to help pay down your existing debt and help you live within your monthly earnings. BUT, they cannot make the debt go away, they help you find a way to deal with it.
• Debt Consolidation - provided you have a good credit score (600+), a decent monthly income with no collections or repossessions on your credit report you may qualify for a debt consolidation loan. There are many lending institutions and credit unions that are willing to work with you if you are serious about paying down your debt. A debt consolidation loan is a great idea if you have multiple loans or credit cards that you want to group into one payment. By consolidating your debt or even part of it, you may be able to lower the monthly payment with better rates and terms.
• Balance Transfers - Balance transfer credit cards are credit cards that come with an extremely low-interest rate (0% - 1.99%). The goal is to encourage people with balances on high-interest cards to move them to a different provider. This can also be a great strategy to help you pay down the balances as long as they are paid off within the 12 month period. If you haven't been able to pay them down, the interest rates go very high and you are back to where you started.
• Debt Settlement (Debt Negotiation) - All of the above options help you manage your debt but they do not alleviate or reduce the debt. Debt settlement is when a person contacts their creditors and asks to pay a lower amount, reduced interest, long-term or all of the above. A creditor is not obligated to negotiate and may, in fact, start legal proceedings against you.

DIY (Do It Yourself) Debt Settlement -

Before going to a debt settlement company you may want to try settling with your creditors yourself. When the phone is ringing and we know it is another collector or the creditor our first impulse is to not answer the phone. But in the long run, ignoring them will not make them go away it will only make them angry.

• Prepare to talk to them - Have all of your facts straight. How much you owe them, how many months you are late. The reason why. A good rule to remember is 'less is more'. Do not have a long detailed explanation of what happened - they do not care. What they do want to hear is the truth - "my partner and I are in the middle of a divorce", "I have been very ill and off of work for 6 months", "I was laid off and have been having trouble finding a new job". Remember these people are trained and can tell if you are being dishonest, so be honest.
• Stay Calm - If they are rude or start to bully you, do not get angry. Just tell them that you are unable to talk right now. Call back later and ask for a different representative or tell the person that you are going to record the call so that you do not forget any instructions. If they threaten you, ask for specifics and details. Write everything down as you can report them to the Consumer Financial Protection Bureau to find out if what they are saying is legal. There are statutes of limitations as to how long creditors have to file a lawsuit to recover your debt. As well, there are very specific laws as to what they can and cannot harass you with.
• Talk to the original creditor, not the debt collector - Try to work out a plan with the creditor before it goes to collections. Late payments affect your credit, but when an account goes to collections it creates even greater damage. Collections can remain on your credit report up to 7 years. If you are having trouble coming to a repayment plan that works, possibly ask if a credit counselor would help.
• Ask for everything in writing - Regardless of the result, ask for everything in writing. Tell them you will not start paying until you have a letter with all of the terms and conditions.
• Ask the creditor to agree to remove the late payments - Settling an account or paying it off will not change your credit report. Late payments, charge-offs, and collections can remain on your credit report for up to 7 years, negatively impacting your ability to secure another credit card or loan in the future. Ask if they will remove the collections and or lates from your report and ask for it in writing.

• Credit Card Programs - The average American has at least two credit cards and depending on how long we have had them, the limits can easily be over $10,000 each. One recent study reported that the average American family has more than $16,000 in credit card debt. Credit card companies have two little-known programs to help individuals manage this debt. Each credit card issuer will have a slightly different program, so you must call and speak to them directly. Often the first person you speak with will either not know about the program or not have the authority to make a decision for you. You will need to find the correct department to speak to someone who knows the program and can help you.
  • Hardship Program - keep your request to the point. Tell them what has happened - BRIEFLY. Then let them know what you can afford or need. They may reduce your interest charges, fees, and minimum payment. By requesting the hardship program, the issuer will suspend your charging privileges temporarily or sometimes permanently. Some issuers will reinstate the card with a lower limit once you pay the balance off. Be sure to ask how the hardship program is reported to your credit bureau. Once you complete the program are the negatives removed from your report.
  • Forbearance Program - depending on the credit card issuer, they may allow you to suspend your payments for 6 - 12 months. They may reduce your interest rate and fees. They will expect the balance on the card to be paid in full.
  • Eligibility - each issuer has a different set of eligibility criteria. Some issuers have different programs depending on where the borrower is in the stages of delinquency.
• Credit Card issuers want to work with the customers who are having trouble making their payments. If the customer files for bankruptcy, the debt will not be repaid. They have a vested interest in helping you through this difficult time. 

Debt Settlement Companies

What they are

Debt settlement companies negotiate on your behalf with creditors or debt collectors to reduce the amount you owe and/or negotiate better terms and rates. They are known as debt relief, debt adjusting and debt settlement companies. They get the creditors to agree to a lesser amount that you owe and then forgive the remaining outstanding debt.

National Debt Relief Review

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The Process

• Most debt relief companies will tell you to stop paying your credit card bills and loan payments. When you stop the credit card issuers will step up their collections of your debt.
• You will then send the debt relief company money to fund an escrow account that they control. When the account has accumulated enough money, the debt relief company will then begin negotiating with your creditors. They may ask that a $12,000 debt be lowered to $6,000. Should the creditor agree to the terms, the $6,000 would then be released to pay the settlement total. The creditor may not accept any settlement or they may accept a different amount. It will be up to the debt relief company to finalize the amount.

Qualifications

• This varies by company but the minimum you must owe on your credit cards is $7,500 and be several months behind on your payments. The credit card companies will not be willing to negotiate if you owe less than this and are current on your payments.
• Must prove hardship (loss of job, illness, separation, divorce, the death of a family member, IRS Taxes) and that you are unable to pay now and in the near future.

How Debt Relief Companies Get Paid

Reputable Debt Relief Companies do not ask for an upfront fee. If they are successful in reducing your debt, they will charge (depending on the state you live in) 15 - 25% of the total debt enrolled.

Risks of using a Debt Settlement Company

There can be risks in using a debt settlement company.

• Be sure they are reputable (listed with the BBB and the AFCC )
• They may charge expensive fees
• Some of the creditors may refuse to work with them and step up their collections against you
• They may not be able to settle all of your debt especially if the debt does not qualify for settlement (see list below)
• Debt settlement services can have a negative effect on your credit score and report
• If a debt is not settled and you have not been making any payments on it, the accumulated interest and penalties may negate any savings on the debt that was settled

Will Debt Settlement Affect My Credit Score and Report?

Chances are your credit score has slowly dropped due to late and missed payments. If you have any delinquent accounts that have gone to collections, your score will have dropped even more. Debt settlement will negatively affect your credit temporarily and it can be improved after you have completed your settlement with your creditors. The effects are not as severe or as long lasting if you had declared bankruptcy. Regardless of whether you go the route of debt settlement, bankruptcy, or slowly paying off your debt on your own if you are looking at any of these options your credit is already seriously hurting. It is better to deal with where you are financially and start the process of rebuilding your credit.

Taxes

If your creditors agree to forgive your debt and it is over $600, your creditors will issue you Form 1099-C. The forgiven debt counts as income. But if you are insolvent (you owe more then your assets) at the time of settlement, you may not have to pay taxes on the forgiven debt. The IRS states that if a taxpayer is insolvent, any forgiven debt may be excluded as income under the 'insolvency' exclusion clause. Our advice is to always check with your accountant or tax professional for your individual circumstances.

Debts that Qualify for Debt Relief

Not all debt qualifies for debt relief. Debt relief companies can help with the following debt -

• Major credit cards, retail cards, gas cards
• Bank loans, Finance Companies, credit unions (Military customers excluded)
• Unsecured personal loans, Installment loans, Business loans
• Bank, Overdraft and Associated Fees
• Repossession Deficiency Balances, Back Rent
• Cell Phones (Not Current), Veterinarian bills over $500, Abandoned Time Shares
• Judgments 6 months or older
• Federal & Private Student Loans with conditions

Debts that do not qualify for settlement or relief -

• Mortgage loans, Auto loans,
• Child support,
• Auto Repair, Speeding tickets or Fines, Bail Bonds
• NSF checks, Cash advances, Balance Transfers, Check Cashing, Gambling Debts
• Warranty Contracts, Insurance Policies, Litigation (less than 6 months)
• AAFES or STAR (military)

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