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In a Nutshell

If you’re struggling to successfully manage your debts, you should know that you’re not alone. Whether it’s student loans, medical bills, or credit card debt, there are several debt relief options available. Each option has its advantages and disadvantages and they don’t all work for all kinds of debts or all borrowers.

Written by Attorney Curtis Lee.  
Updated October 19, 2021


If you’re struggling to successfully manage your debts, you should know that you’re not alone. Whether it’s student loans, medical bills, or credit card debt, there are several debt relief options available. Each option has its advantages and disadvantages and they don’t all work for all kinds of debts or all borrowers. It can sometimes be confusing to sort through them to determine which might work best for your situation. That’s why we created this article: to offer you an overview of the major debt relief options out there and to explain how they may be able to help you become debt-free.

DIY Debt Relief Negotiations With Your Creditors

One of the first steps you can take towards achieving debt relief is to talk to your creditors. Before you reach out to a creditor to negotiate debt relief, you’ll want to develop a budget.

Having a budget is important because you may need some cash available for whatever arrangement you make with your creditor. Whatever agreement your creditor accepts will more than likely require you to send them monthly payments or a lump sum payment. Also, when you reach out to your creditors, keep a few things in mind:

  • Figure out what you’re going to say. When you speak with a creditor, feel free to explain your financial struggles, but be brief. Explain why you’re asking for debt relief, how you plan to get it, and how your creditor can help.

  • Be patient. It might take multiple calls or letters to your creditor to get the debt relief you want. But, you’ll probably be able to tell after one or two calls if your creditor is willing to negotiate. If they aren’t willing to work with you, seek solutions beyond direct conversation with your creditor.

  • Set a goal before you call. If you want to settle a debt or adjust your monthly payments to a certain amount, know what that amount is before you call. Once negotiations begin, don’t be afraid to start with a value that’s lower than what you’re willing to accept. Like haggling at a car dealership or yard sale, there could be some back and forth until you and your creditor finally reach an agreement.

  • It’s okay to move on. Not all creditors are accommodating when it comes to debt relief negotiations with their borrowers.Don’t worry if your attempts to negotiate don’t give you the results you were hoping for. Just like when buying a car, if you can’t get the deal you want, it’s okay to move on and try somewhere else. There are other options available to you that can help you manage your debt successfully. 

Secured vs. Unsecured Debts

Creditors of unsecured debt (like credit card debt, medical bills, and student loans), tend to be more willing to discuss debt relief with you. By contrast, a creditor of a secured debt, such as a car loan, may not be as accommodating. 

If you default on a secured debt, your creditor can get all or most of its money back by repossessing the property securing the debt. This might include foreclosing on your home or repossessing your car.

When negotiating with a bank or mortgage company to avoid foreclosure, your lender should have several loss mitigation options for you to consider. These may include loan modifications, mortgage forbearance agreements, and refinancing your mortgage.

Negotiations with the holder of your auto loan will probably be the most difficult in terms of getting generous terms. This is because repossessing a vehicle is one of the fastest and most effective types of debt collection procedures available. There are two major reasons for this.

First, car loan lenders don’t usually have to go to court to repossess a car when the borrower is in default. Second, a car can be towed away more easily than a house can. The fact that most people don’t live in their cars - and often leave them unattended for long periods of time - makes it easy for a creditor to retake possession of a car.

How To Handle Debt Collectors

If third-party debt collectors are trying to collect a debt from you, negotiating with them can be challenging. They tend to be more likely to use questionable and abusive debt collection tactics than primarily lenders are. This doesn’t mean that negotiating isn’t possible, but you’ll need to be extra vigilant that they don’t try to bully and harass you. 

To combat this phenomenon, there’s the Fair Debt Collection Practices Act (FDCPA). The FDCPA is a federal law that sets out rules by which certain debt collectors and debt collection agencies may collect consumer debts from borrowers. If violations of the FDCPA occur, you can file a complaint with the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB).

Credit Counseling 

If you want to contact a credit counselor, choose an accredited, non-profit credit counseling company. To find a member of the National Foundation for Credit Counseling (NFCC) that is located near you, check out the organization’s website. This membership designation helps to ensure that you’ll be working with an organization that will prioritize helping you with your debts instead of maximizing profits. The NFCC also offers some great finance and credit resources of its own.

One of the benefits of a credit counselor is that they can provide an objective analysis of your financial situation. They can help identify areas of improvement for your budget and financial expenses. Nonprofit credit counselors have extensive experience helping consumers identify where their budget could be stretching more effectively and how to work with creditors to more successfully manage debt. 

Many non-profit credit counseling organizations will offer their basic services for free. For example, anyone who wants one can take advantage of a free credit counseling consultation. They may charge a fee for their more advanced services, such as debt management plans. 

Debt Management Plans (DMP) 

A debt management plan (DMP) is a type of debt management program wherein the borrower works with a non-profit credit counseling agency to create a more affordable debt repayment plan with their creditors. The credit counseling agency will negotiate with your creditors on your behalf to obtain better terms for your debts. A great feature of this approach is that it can halt fees associated with overdue balances. Even though you may be behind on your payments, negotiating a DMP will end this particular stressor, provided that you make your payments on time moving forward. 

Most of the time, your underlying debt owed will stay the same, but you might get a lower interest rate, which can lower your monthly payments and save money in the long run. DMPs will also sometimes result in a longer term on an installment loan.

Once a DMP is set up, you’ll make one payment each month to your credit counseling agency. They will then distribute the money to each of your creditors per the terms of your plan. 

The initial counseling session is free if working with a non-profit credit counseling agency. But before the DMP payments begin, there may be a small set-up fee. During each month of the plan, you’ll pay a fee to the credit counseling agency. This is one of the reasons why it is so important to work with an accredited, non-profit agency. They aren’t out to make a profit, so they won’t overcharge you for use of this debt relief service.

Using a Debt Settlement Company 

Debt settlement companies are for-profit enterprises. As they are out to make a profit, they tend to protect their bottom line ahead of protecting their clients. This can lead to debt relief companies charging borrowers high fees. In worst-case scenarios, it means that some debt settlement programs are outright scams. These companies are usually best avoided for these reasons. Even if you find a trustworthy debt settlement company that can reduce your debt, you’ll have to take into account potential taxes. This is because the IRS may consider forgiven debt as taxable income.

Risks of Working With Debt Settlement Companies

You don’t necessarily need to avoid all debt settlement companies. But before signing up with one, you should be aware of some of the additional potential risks and pitfalls traditionally associated with these enterprises.

First, debt payment plans set up by debt settlement companies can last 36 months or more. Many borrowers seeking debt relief have trouble making consistent payments for this long. This is not common, as most creditors won’t agree to a debt settlement scenario unless they are paid in a single lump sum or over the span of just a few months. But, it is a danger worth considering nonetheless. 

Second, while debt settlement companies can have some sway with creditors, creditors aren’t required to accept a debt settlement company’s offer. In other words, there’s never a guarantee that a debt settlement company will get you more favorable terms for your debt.

Third, a major strategy of debt settlement companies is to have borrowers stop making payments to their lenders. The reasoning is that creditors will be more willing to settle a debt for less than what the borrower owes if the creditor isn’t getting any payments. However, this can lead to creditors taking debt collection actions against you, like filing a lawsuit. At a minimum, it’ll cause your credit score to take a hit. Understand the risks associated with failing to make payments before you commit to this strategy.

Fourth, there are a lot of scams in the debt settlement industry. A common occurrence is for a scammer to ask for a fee upfront and then never deliver on their promise of debt relief. 

You can help to protect yourself from some of these pitfalls by doing research before working with a debt settlement company. You can look them up using an online search engine, contact your state’s attorney general’s office, and check with the Better Business Bureau.

Disclosure Requirements for Debt Settlement Companies

When dealing with a debt settlement company, they’re legally required to disclose certain information to you. A debt settlement company must explain:

  • Its fees and any conditions of its services.

  • How long it will likely take to make an offer with each creditor.

  • The percentage of your total debt that you must save before they'll make an offer to each creditor.

  • The negative hit that your credit history will take if you follow their recommendation of not making payments to your creditors.

  • That any money in a debt settlement bank account remains yours until a settlement is paid.

  • That any interest earned while your money sits in a debt settlement bank account is yours.

  • How the bank account holding your money isn’t connected to the debt settlement company and that the bank doesn’t receive any referral fees from them.

Debt Consolidation

Debt consolidation involves combining multiple debts into a single account. One of the most popular kinds of debt consolidations works by combining multiple debts into a new loan. For example, a debt consolidation loan may be used to help borrowers with their credit card debt by converting multiple high-interest credit card accounts into a single account with a lower interest rate. 

A credit card balance transfer is a popular way to achieve this aim. Many credit card companies offer new and existing customers lower interest rates for balance transfers, although there’s often a transaction fee.

When done properly, borrowers pursuing debt consolidation will gain three advantages. First, they will likely spend less money overall to pay off their loans. Second, they will likely be obligated to pay less money each month on their consolidated account as compared to making multiple payments to each creditor. Third, only having to make one payment every month can make the debt repayment process more manageable. Many borrowers discover that they incur fewer late fees, simply by having fewer accounts to keep track of.

One of the key questions many borrowers face when looking into debt consolidation is whether to close old accounts after their balances have been paid off. There are two ways to answer this question:

  1. The financial approach says yes, keep those accounts. A credit score will look at how much available credit someone has in relation to how much debt they’re carrying. The more available credit there is, the better the credit score.

  2. The practical approach says no, close those accounts. If your debt became so unmanageable that you had to use debt consolidation, it may not be the best idea to have the temptation of so much credit available for use. 

If you’ve just gone through the trouble of obtaining debt relief, you probably don’t want to get into more debt any time soon. The best thing to do will be to keep one or two credit cards, but only use them for emergencies.

A potential disadvantage of debt consolidation can occur if you use a home equity loan to consolidate your credit card debt. This is a popular option because the interest rate on a home equity loan is often lower than the interest rate on a credit card. 

The problem with this approach is that it turns unsecured credit card debt into secured debt. With a home equity loan, your home becomes collateral. If you can’t make your home equity payments, you put your home at risk of being foreclosed upon. Another problem is that credit card debts are dischargeable in a Chapter 7 bankruptcy, but a home equity loan isn’t (assuming that you want to keep your home). In short, don’t use a home equity loan to pay off your credit cards. The downsides outweigh the benefits of this approach. 

How Bankruptcy Can Help 

For most borrowers, filing for bankruptcy will be the most powerful tool they can take advantage of when seeking debt relief. This is especially true with unsecured debts, although there are two exceptions.

The first exception is tax debt. Not all tax debts can be discharged through bankruptcy. Some can be eligible for discharge under certain conditions, but there might be better options available. 

For example, you could pursue an offer in compromise (OIC). This would allow you to settle your tax debt for less than what you owe. If getting an OIC makes it possible to avoid filing for bankruptcy, it might be a good idea to consider that approach. To better understand what options will work best for your situation, you’ll want to consult with a tax or bankruptcy attorney.

The second exception is student loan debt. Student loans receive special treatment under bankruptcy law in that they aren’t dischargeable unless they create an “undue hardship” on the individual. 

There’s also the fact that there are several debt relief options available for borrowers with federal student loans that don’t involve bankruptcy. For instance, there are Income-Driven Repayment Plans. These allow borrowers with federal student loans to reduce their monthly payments based on their income for a period of time. Any balance left over after that time period is forgiven.

There are debt relief options available for private student loans as well, like student loan settlements. A student loan attorney can help you figure out how to negotiate the best settlement possible or other debt relief avenues to consider.

Chapter 7 Bankruptcy

Sometimes known as “liquidation bankruptcy,” Chapter 7 bankruptcy’s most notable feature is that it allows borrowers to erase much of their debt. This can offer the “fresh start” that so many people in debt wish to have. 

Another advantage of Chapter 7 bankruptcy is that it doesn’t take long to complete. Depending on the borrower and the circumstances surrounding the bankruptcy, Chapter 7 bankruptcy can be completed in as little as three to six months.

 Not all debts are dischargeable under Chapter 7. While most unsecured debts are dischargeable, most tax debts and student loans aren’t often discharged through Chapter 7.Then there are secured debts, like a car loan and mortgage. They can be discharged if you’re willing to give up the property. But if you want to keep your car or your house, then any loan attached to it can’t get discharged through the Chapter 7 process. Individuals with significant secured debts often do better when filing under Chapter 13 of the Bankruptcy Code.

In most Chapter 7 bankruptcy cases, filers get to keep all of their property. With the help of exemptions, much of a filer’s property, like clothing, money, and primary vehicle can be kept after filing for bankruptcy.

Chapter 7 bankruptcy sounds like a great option if you need debt relief. But not everyone’s eligible to use it. Only those that pass the “Means Test” will qualify. This is a test that compares the filer’s income to the median income in their state. If the filer’s income falls below this threshold, they’ll pass the Means Test. For those that can’t pass the Means Test, they can still file for bankruptcy, but they’ll need to file under Chapter 13.

Chapter 13 Bankruptcy 

Chapter 13 bankruptcy offers borrowers the ability to “reorganize” their debts. Specifically, the Chapter 13 process will entail a review of the filer’s financial situation and debts and the creation of a repayment plan based on the filer’s ability to pay those debts. 

This repayment plan can last from three to five years. During this time, the filer will make monthly payments to the bankruptcy trustee assigned to the case. The bankruptcy trustee then distributes this money to the filer’s creditors as approved by the bankruptcy court. Any eligible debts remaining after that time period can be discharged. 

In some respects, Chapter 13 bankruptcy is a little bit like certain debt relief programs, such as debt settlement or a debt management plan. But it’s different in that there’s a lot less room for negotiating. Unlike a debt settlement or DMP, the Bankruptcy Code controls most of the rules in regards to how a filer’s debts will be handled.

Chapter 13 bankruptcy has two significant advantages over Chapter 7. The first advantage is that a Chapter 13 bankruptcy stays in your credit report for seven years while a Chapter 7 bankruptcy stays on your credit report for 10 years.The second advantage is that in a Chapter 7 bankruptcy, if property isn’t protected by an exemption, the bankruptcy trustee can sell it to repay creditors. Under Chapter 13, as long as you make your monthly payments to the bankruptcy trustee, you can keep your property.

Let’s Summarize…

If the amount of debt you’re dealing with has become unmanageable, then you’ll want to consider the various forms of debt relief that are available. The process of finding a solution should begin with contacting your creditor and asking them for some help with your debts. 

If this doesn’t help, you can reach out to an accredited, non-profit credit counselor. They can offer financial advice about budgeting and objectively determine which debt relief options may be best for your unique situation. These options may include debt management plans, hiring a debt settlement company, debt consolidation, and bankruptcy. Depending on the complexity of your situation, consulting with an attorney that focuses on tax, debt, or bankruptcy issues is also an option worthy of consideration.



Written By:

Attorney Curtis Lee

LinkedIn

Curtis Lee is a writer and co-owner at Marvel Hill Freelance. Curtis earned his Bachelor of Science in Business from Wake Forest University and his Juris Doctor from Villanova University School of Law. After graduating law school, Curtis had the honor of clerking for a state cou... read more about Attorney Curtis Lee

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