Choose carefully before you apply.

Introduction

Debt relief is a way to help you pay off your debts and avoid bankruptcy. There are several types of debt relief, but some are more beneficial than others. Read on to learn more about these options so that you can make an informed decision when choosing which debt relief option is right for you.

What is debt relief?

Debt relief refers to a variety of strategies for making debt easier to handle. What debt relief looks like for you may hinge on the types of debts you have and what you need help with most.

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 counselling, debt management plans and debt settlement also fall under the debt relief umbrella. While the means are different, the end goal is similar. Debt relief is about helping people find a workable path to eliminating debt.

How Does Debt Relief Work?

Debt relief works by making it easier for you to reduce your debt burden. The first step is realizing that you need help with managing debts. The next step is choosing a debt relief option.

Some of the ways debt relief can work include:

• Interest rate reductions
• Changes to credit card or loan repayment terms
• Reducing the principal amount owed
• Consolidating debt
• Loan Refinancing

Bankruptcy can also be considered a form of debt relief. But there can be significant credit score impacts associated with filing for bankruptcy.

When comparing debt relief programs or options, it’s important to consider both the good and the bad.

When You Should and Should Not Seek Debt Relief

Debt relief may not be right for everyone. So, before digging into the options, it’s helpful to understand who debt relief is suitable for.

You may consider debt relief if:

• You’re behind on credit card bills or other loan payments.
• You’re not behind on bills yet, but you’re struggling to afford your payments.
• You’ve tried to manage your debt on your own, but you can’t seem to make any progress.
• You’ve contemplated filing bankruptcy.

Debt relief may not work for you if:

• You’re continuing to add to your debt balances.
• You’re not interested in making a long-term commitment to repaying debt.

If you’re still creating new debt, then debt relief alone may not be enough. You may also need to address the spending habits that are keeping you in debt.

Debt Relief Options

Debt relief isn’t a one-size-fits-all solution. There are different ways you can approach it, depending on how much you owe and what type of interest rates you’re paying.

Here’s a closer look at four of the most common debt relief options.

Debt Consolidation

You may choose to consolidate debt if you have several different loans or lines of credit to repay. But what is debt consolidation and how does debt consolidation work?

In simple terms, debt consolidation means combining multiple debts into one. For instance, you may use a personal loan to consolidate debt from multiple credit cards.

Balance transfers are another option for credit card debt relief. In this case, you’d open a new credit card account, ideally at a low or 0% annual percentage rate, then transfer your existing balances to this card.

Consolidating debt means you’ll have just one payment to make each month. It may or may not save money on interest, however. It’s also important to understand the pros and cons of debt consolidation.

Credit Counseling

Credit counselling involves meeting with a credit counsellor to discuss your budget, debt and finances. A credit counsellor can review your spending and debts, and then help you create a personalized plan for managing both.

Seeking out a credit counsellor could be a good fit if you just need some help with creating a workable debt repayment plan. A credit counsellor also may help educate you on basic budgeting issues that could have led to your having excess debt in the first place.

Debt Management Plans

If you’re working with a credit counsellor or a debt relief program, one possibility they may suggest is a debt management plan. A debt management plan, or DMP, works like this:

• You choose which debts to enrol in the program.
• You make one single payment to the debt management plan each month.
• That payment is distributed among your creditors, according to the terms of the plan.

Debt management plans are similar to debt consolidation, in that you only have one payment to make. But this type of debt relief program doesn’t require you to take out a loan or open a balance transfer credit card. And, depending on the program, you may be able to get your interest rate lowered or have certain fees waived.

Under the terms of a debt management plan, while you may receive more favourable interest rates or relief from fees, you still repay the entire principal amount owed.

Debt Settlement

Debt settlement is considered an option of last resort. It allows you to pay off debts for less than what’s owed. If your creditor agrees to a debt settlement, any remaining balance is cancelled.

This is effectively a type of debt forgiveness since you don’t have to repay anything more than the agreed-upon settlement amount. Debt settlement is something you can do yourself if you have the cash to pay your creditors and you’re comfortable negotiating with them one on one.

There are also debt relief companies that will negotiate for you.

Also, keep in mind that you typically need to be past due before a creditor will consider settling a debt. So, compared to other debt-relief options, debt settlement can be more damaging to your credit score.

What to Know Before You Apply for Debt Relief

Debt relief programs can help you get out from under your debt burden. But it’s a decision that needs to be made carefully. It isn’t necessarily a perfect solution and there may be some serious trade-offs to make.

Before getting started with debt relief, here are three important things to consider.

Interest

Debt consolidation loans or lines of credit and 0% balance transfer offers can provide credit card debt relief. But consider the cost involved.

Ideally, consolidating debt results in a lower interest rate. A lower APR means more of your monthly payment goes toward the principal so you can repay your debt faster. You also accrue less interest over your repayment period.

If you’re interested in how to consolidate debt, first consider the rates you may qualify for based on your credit score. And, if you’re interested in something like a debt management plan, ask whether a rate reduction is a possibility when working out repayment terms.

Scams

When you’re interested in debt relief services, whether it’s credit counselling, a debt management plan or debt forgiveness, it’s important to ensure that the company you’re working with is legitimate. Otherwise, you run the risk of falling victim to a debt relief scam.

You also want to understand the differences, as outlined above, among debt consolidation, debt management plans and debt settlement. Not all debt relief providers use these terms enough for you to understand what you’re getting into unless you read or listen very carefully.

As you compare debt relief companies, be aware of the following red flags:

• Demands for fees that must be paid before services can be offered
• Lack of transparency in explaining what the company does or provides
• Requests for access to personal or banking information
• Promises or guarantees that seem too good to be true

Conclusion

If you’re weighed down by debt, then debt relief could help you find the light at the end of the tunnel. It can also help head off the possibility of having to file for bankruptcy. Understanding what you hope to get from debt relief and how it can help is critical for choosing the right solution.