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Debt Relief: The Ultimate Guide To Freeing Yourself From Debt
Everybody’s got bills and from time to time – it can get tricky to figure out how to pay them all. Unexpected expenses, loss of a job, natural disasters, and a long list of other factors can knock a family on their butt and allow bills to get out of hand quick. However, getting behind on bills isn’t something you just have to let happen. Instead, start working on how to get out of your current financial crisis before it spins out of control. There’s lots of way to do this and there’s plenty of companies out there that will be more than happy to take your money in order to help. It’s your job to find out what will work in your situation and what won’t.
Some people recover quickly, usually those that had emergency expenses in a savings account, and others, usually the ones living paycheck to paycheck, will struggle to keep themselves above water until it just gets too hot and they need to find a way to get things under control quick. Contrary to what you may believe when bill collectors are relentlessly ringing your phone, you can take action and get your bills under control.
One of the fastest, best, and most affordable ways to do this is through debt relief. That’s why we put together this Ultimate Guide To Freeing Yourself From Debt.
Below, we will go over debt relief including what it is, who might need or want it, how to use, and give examples of good and bad organizations in the business. If you follow the tips and suggestions listed here, you can at the very least feel more confident when you are trying to keep yourself out of bankruptcy court and still keep your bills paid on time.
Why Debt Relief?
Table of Contents
- Why Debt Relief?
- History of Debt Relief
- Types of Debt Relief
- Consolidation Loan
- Debt Settlement
- Debt Management Program
- Credit Card Debt Relief Options
- Student Loan Debt Relief
- Mortgage Forgiveness Debt Relief Act
- Examples of Cancelled Mortgage Debt that is Tax Exempt
- Facts About Mortgage Forgiveness Debt Relief Act
- Most Popular Debt Relief Programs
- InCharge Debt Solutions
- Prosper Funding
- Wells Fargo
- Freedom Debt Relief Review
- National Debt Relief Review
- Final Thoughts and Tips
Debt relief is the partial or total forgiveness of debt. There are many ways to do this and not all methods are a good idea for every debtor. More specifically debt relief, is defined as the reorganization of debt in any shape or form.
Deft relief is a popular option for many because it can force a debt to stop growing. Reorganizing debt can also include reducing principal amounts, extending a loan to lower payment amounts, or simply lowering interest rates to make a debt easier to manage. Individuals, corporations, and even nations are able to take part in debt relief.
The most important thing to remember in this situation is that the sooner you can get a handle on your debt, the better off you will be in the future. By letting unpaid bills set around and ignoring calls and letters from collection companies, you are allowing your debt to get out of control. In fact, it doesn’t take very long for a debt to snowball into destroyed credit, denied loans, and a depressive future with hounding phone calls and maxed out credit cards.
By taking the initiative to handle your situation before it bankruptcy is your only choice is the best way to dig yourself out of a hole. It’s important not to let your pride or feelings of shame get in the way of doing what you need to do to repair your credit.
History of Debt Relief
In the 19th and 20th century, the term debt relief dealt with domestic debts and monies owed by Third World countries. In the 21st century, the term became applicable to individuals and corporations as a result of credit bubbles and housing bubbles. In fact, when the threat of borrowers defaulting on loans became greater than the expectation that a loan would be paid entirely, creditors became more willing to accept debt relief as a payment option.
Types of Debt Relief
There are many different types of loans in the financial market. For this reason, there are different types of debt relief as well. Some borrowers will be ineligible for some types of debt relief because of credit rating or secured assets. Others won’t be interested in relief options that put their home or other collateral at risk. Below, we will go over some of the most common debt relief options.
A consolidation loan is ideal when a borrower is not in a dire situation. For many, a consolidation loan is a better option than transferring the balance of credit cards to another credit card because the loan allows the borrower to get a better interest rate.
However, a consolidation loan may not be a good idea for those that are already in a serious situation regarding their credit card balances. If a person is having a hard time keeping up with established bills simply transferring them from one creditor to another might not be enough to help them reduce their debt to an affordable payment.
Debt settlement is the process of negotiating with creditors to reduce monies owed. Creditors are usually only willing to work with debtors that have already begun missing payments. As soon as a debtor starts missing payments, their credit score has already begun to be affected.
Settling debts for amounts less than the original amount owed negatively affect a person’s credit score. Additionally, any amounts forgiven by the creditor will be reported to the IRS as reportable income, which means the debtor will be responsible for paying taxes on the amount.
Debt Management Program
Another option for debt relief is a debt management plan or program. Those that owe money can try a DIY debt management program, or can hire a company to do it for them. One of the biggest concerns with hiring a company to handle debt management on your behalf is cost.
In addition to cost, there is no guarantees that a debt management program will relieve your financial burdens. If you do hire a company to create a debt management program for you, the Federal Trade Commission recommends a person contact all creditors themselves to guarantee a proposal is accepted by the creditor and that all payments are being made appropriately as planned.
No one wants to think about bankruptcy. In fact, it’s the last resort for most debtors. However, in some situations, it can be the most effective. While your credit report is negatively affected for about 10 years, all of your debt can be erased. Even better, unlike some debt relief options, the amount of monies discharged during a bankruptcy are not considered taxable income, so a debtor has no responsibility to pay taxes on the amount discharged.
Credit Card Debt Relief Options
In terms of credit card debt that are a number of relief options. Credit card debt is almost always unsecured debt, which means there are many ways to reduce the amount of money that most be repaid.
One option that might interest those struggling with credit card debt is interest rate negotiation. Reducing the interest rate on your credit cards could allow you to decrease your monthly burden. For some simply reducing the interest rate on credit cards is enough to give them room to breathe and feel less financial pressure.
By reducing the interest rate, the amount owed won’t accumulate as quickly. It will also allow the debt to be paid down faster, and any payments made with a lower interest rate will put a bigger dent in outstanding balances.
Unfortunately, credit card companies will usually only work with those that have a strong payment history and good credit score. If a credit card holder doesn’t possess both of these qualities, they probably won’t be able to negotiate their credit card interest rate on their own.
Another popular option with those with high balance credit cards is a balance transfer. Transferring all of your credit card balances to one new credit card can provide you with a lower interest rate and provide the convenience of just one payment. However, the only thing to be cautious of is high balance transfer fees. Usually, the cost of transferring balances is outlined in fine print. It’s also worth noting that some credit cards have conditions that must be met to qualify for 0% interest or low fees.
Like other types of debts, credit card debt relief may be possible through a debt management program. A DMP is a great option for those with low credit ratings and no other options. In this situation, credit score is not a factor of approval. The best way to enroll in a debt management program is to enroll through a credit counseling agency.
After enrolling with a reputable agency, the agency will work with the credit card company to negotiate on your behalf. The best case scenario in this situation is that the credit card company will reduce or eliminate late fees and overlimit fees and drop the overall interest rate as well.
If your agency is able to work with your credit card company, you will make one payment to the credit counseling agency and it will be disbursed on your behalf.
Last is the least favorable solution to credit card relief and that is debt settlement. Debt settlement negatively affects credit scores and should be avoided at all costs. However, if you are in a place where you owe more than you’ll ever be able to payback, you may be able to settle your debt with the credit card company for a portion of what you originally owe.
Usually credit card companies will only work with debtors that have a bad track record and low credit rating. From the companies point of view, the debtor is already a huge risk and receiving any money owed towards the debt is better than receiving none if the person eventually chooses to file bankruptcy.
Student Loan Debt Relief
Most people take out student loans when they are very young. Unfortunately, this compounds the student loan debt crisis because many borrowers are unaware of how much money they are actually borrowing and even worse don’t know how they will repay this loan when they graduate college.
Compounding matters even worse is the fact that student loan debt is one type of debt that must be paid back. For those that are struggling to pay student loans, finding options might be troublesome.
Unfortunately, there are people out there that realize how naïve some student loan borrowers are and are prey on that. For example, many people who have outstanding student loan balances are blasted with solicitation from companies offering to drastically reduce their amount owed.
These solicitations usually come in the form of social media ads, mobile ads, mail fliers, and unsolicited phone calls. Usually these companies offer deals that seem too good to be true. And the truth of the matter is they likely are.
Most of these companies border on being scams because a student should never have to pay to get help with their student loans. Instead, the Department of Education offers debt relief options for free. The companies that offer to work on your debt for you often charge exorbitant fees, which can cause the outstanding balance to explode and may even cause some debtors to default on student loans.
Instead of working with independent companies to reduce student loan burden, borrowers should seek assistance directly from the Department of Education. The government agency can help a borrower lower payments, cap payments at an affordable amount, see if the borrower qualifies for loan forgiveness, and assess whether consolidation is possible. If no options work perfect, customer service at the Department of Education can provide sound advice and guidance regarding student loan debt options.
Mortgage Forgiveness Debt Relief Act
The Mortgage Forgiveness Debt Relief Act is tax legislation that was originally signed by President George W. Bush on September 25, 2007. Since its origination, the legislation has been extended three times including most recently with a new extension into 2017.
The legislation offers homeowners who would normally have to pay taxes on forgiven mortgage debt a reprieve. However, this reprieve only comes into play if the mortgagee was facing foreclosure before the sale of their home. This tax legislation is watched closely because the expiration of the laws would make any forgiven mortgage amounts to become taxable income. The ability to tax would also apply to foreclosures and loan modifications.
Examples of Cancelled Mortgage Debt that is Tax Exempt
Some cancelled mortgage debt is not always taxed by the IRS. Some examples of forgiven mortgage loan amounts that are not taxed include:
- Qualified principal residence indebtedness
- Some farm debts
- Non-recourse loans
Bankruptcy and insolvency are also not taxable under current tax legislation. It’s also important to remember if any debt is cancelled by a creditor, it will likely be reported to the IRS.
Facts About Mortgage Forgiveness Debt Relief Act
Many homeowners struggling to make mortgage payments have questions about the debt relief act. Primarily trying to decide whether they qualify under the tax legislation or not. To make it easier to understand, here are some simple facts.
- Can only be applied to a primary residence
- Amount forgiven cannot exceed $2M
- Some refinanced mortgages may qualify for mortgage forgiveness
- Lenders do not have to forgive any mortgage amounts
To get a better understanding of how this legislation works consider the following scenario.
- A home is purchased for $175,000
- A mortgage of $150,000 is attained
- Later the homeowner needs to sell because of a financial hardship
- The home appraises at $120,000
- The homeowner owes $132,000
In this situation, the homeowner is upside down on their loan. They need to sell the home because they can’t afford it, but it is valued at less than the owner owes. In this situation, the homeowner can request a forgiveness in the amount of $12,000.
Under the Mortgage Forgiveness Debt Relief Act, the homeowner does not have to claim the forgiven $12,000 as taxable income. While many debt relief companies will offer services regarding this legislation to consumers, it’s not always a good idea.
Due to the restrictive design of the law, it is best for a homeowner seeking mortgage debt relief to seek a tax specialist. An account can help to ensure that a homeowner qualifies for the exemption and can help facilitate any paperwork or other details that need to be completed for the process to go as smoothly as possible. If you are considering a mortgage debt relief action on your primary property, you should be aware that secondary properties, vacation homes, and other properties are not eligible for this type of tax exemption.
Most Popular Debt Relief Programs
If you simply search for debt relief programs you will be flooded with choices. So how do you know which one is right for you? Well, it requires a bit of research. First, you need to start with a reputable referral source. Here, we have used www.debt.org.
According to the site, they recommend looking for the following features when choosing a debt relief program or company to help you.
- Transparency in the process
- Fees are outlined and don’t vary
- High BBB rating
- Complaint history (pay attention to how the company handles complaints)
With this in mind, we uncovered three companies that meet all of the criteria above and may be able to help a debtor with debt relief.
InCharge Debt Solutions
InCharge Debt Solutions is a non-profit 501(c)(3) agency that specializes in credit counseling and debt management. The company meets all of the criteria above and also employs only certified counselors to work with its clients.
Prosper Funding is an online only lending service. What this means is when a debtor works with this company all transactions will be handled online. Debtors can apply for quick loan approval that can help them reduce their debt. The fees vary based on credit history. The minimum credit history to apply at Prosper Funding is a 640, which automatically disqualifies some people struggling to pay their bills.
Of all the options mentioned above, Wells Fargo is the only traditional brick and mortar bank. Not only is the bank familiar to many, but it is also considered the third largest bank in the United States. Borrowers can apply for secured or unsecured personal loans through Wells Fargo.
With huge assets at its disposal, the bank is willing to work with those needing debt relief. While the bank will accept applications from anyone, there are a few matters that increase a borrower’s chance of receiving a debt relief loan including:
- Being a current customer
- Having a strong credit history
- High credit score
- Having equity in a home or vehicle
Freedom Debt Relief Review
If you are looking for a solution to your debt situation you may be familiar with the name Freedom Debt Relief (FDR). The company proclaims themselves to be a leader in the debt-settlement industry. Without even looking at your financial situation, the company wants you to believe they can reduce your debt and manage a way for you to pay it off in as little as two years and no more than four years. As if those promises weren’t good enough, the company also advertises that they can help a debtor do this without credit counseling or bankruptcy.
Remember when we discussed if something sounds too good to be true, it probably is. Well, that seems to be the case with Freedom Debt Relief. Unlike debt management companies, Freedom Debt Relief, negotiates with creditors to slash the amounts owed. It’s worth noting that Freedom Debt Relief is an umbrella company to several other agencies including:
- Freedom Financial Network
- Freedom Tax Relief
When a debtor signs up with FDR, they are required to deposit amount 15% of their outstanding balances into a specific bank account. Next, the client signs a power of attorney document that allows FDR to draw money from that account and pay a client’s debts.
A recent Consumer Reports investigation uncovered that many FDR clients have had negative experiences with the company. In some instances, clients saw their amount owed explode, debts weren’t being paid as agreed, and FDR was charging excessive administrative and service fees.
The allegations lead to FDR being sued in California. FDR settled without admitting guilt in exchange for that state of California dropping an unrelated case against the company regarding its lack of appropriate licensing. However, the debt settlement’s company legal problems don’t end in California.
Freedom Debt Relief is being investigated in Colorado and Rhode Island as well. In the state of New York, the Attorney General’s office is investigating the company’s operating and billing practices.
With the controversy surrounding Freedom Debt Relief and its umbrella companies, debtors may be better off trying to settle their debts on their own by working directly with creditors.
National Debt Relief Review
National Debt Relief (NDR) is in no way affiliated with Freedom Debt Relief. Instead, NDR is a BBB accredited business with a A+ rating. The business headquarters is located in New York, NY. Like others in the business, National Debt Relief advertises it can help debtors get out of debt without having to get a loan or file for any type of bankruptcy. NDR even offers the same timeframe (two to four years) as FDR. However, according to the BBB file on National Debt Relief, there are no past or pending government actions against NDR and only a handful of negative complaints. It’s worth noting that all negative complaints or issues regarding the company were addressed and handled in terms the BBB accepted.
NDR offers clients a variety of options including debt consolidation loans. However to participate in this program, the company requires a client to have a minimum of at least $7,500 in unsecured debt. According to the company’s website, it can reduce a debtor’s existing burden of unsecured debt. The reduction of debt is possible through reducing balances on credit cards, medical bills, and stopping repossessions.
The company works mostly with individuals but can work with some business debts and unsecured obligations. Although there isn’t much to be own with student loan debt, NDR offers some debt options for those struggling with student loan balances.
While working a debt settlement company should be most debtors last resort, National Debt Relief appears to be the most legit of those in a field littered with scammers. The types of debt NDR cannot help with include:
- IRS Debt
- Back Taxes
- Utility Bills
- Auto Loans
- Government Loans
- Home Mortgages
- Countrywide Debt Relief
Countrywide Debt Relief is one of the oldest debt relief companies in the business. With over 30 years’ experience helping consumers negotiate and settle bad debt, the company is well-respected in the industry. Located in Santa Ana, California, the agency offers several services to debtors including; debt settlement, debt consolidation loans, credit counseling, and as a last resort can advise debtors regarding bankruptcy.
The way Countrywide Debt Relief operates is that they help consumers get out of debt by reducing the amount of money owed on bills. The types of debt Countrywide can help consumers deal with include:
- Credit Card debt
- Debts with pending lawsuits
- Unsecured personal loans
- Collection accounts
Overall the debt relief company has a great reputation with current and past clients. The Better Business Bureau has given the business its highest rating of an A+ and most consumers stated they would recommend the business to a friend. It’s important to note that consumers considering debt relief should contact a Countrywide or another agency in the industry before collection accounts are brought to court. Once a debt has been escalated to a lawsuit, it’s more difficult for a debt relief agency to work on a debtor’s behalf.
Final Thoughts and Tips
Anybody can be susceptible to a financial crisis. Poor planning or unforeseen circumstances can be difficult to overcome. If you ever need debt relief, it’s important how to find it and who you should trust. With that in mind, it’s important to check out any agency you are considering working with. Of course, you can read online reviews from customers just like you, but you can’t guarantee those are real reviews from actual customers.
Instead, look up the company with the BBB and a State Attorney General’s office. Both the BBB and State Attorney General’s office have practices in place that help them verify reviews and differentiate between factual and fabricated reviews. If you are having trouble locating a company with the BBB or Attorney General’s office, you need to locate where the agency’s headquarters are located. Almost always, when complaints are filed with both of the organizations listed above, it is in the state where their headquarters are located.
You also need to ensure you get everything in writing. Things you need to get in writing from any business you hire to help you with your debt include:
- How much the process will cost you?
- What bills are being included in the process?
- What services the company is providing?
- How long the process will take from beginning to end?
It’s inevitable that you will verbally discuss most of this information with a representative but it’s important to remember if you run into a problem, you will need more than the recollection of a conversation to prove your case. In fact, if you don’t have the contingencies of the agreement in writing, it doesn’t actually exist in the eyes of the law.
Don’t let being in debt destroy your life and self-esteem. No matter how bad your situation is, there are solutions that may be able to modify or relieve some of the pressure you are feeling. The best thing anyone can do for themselves is to make sure they contact creditors or someone to help them with their credit situation as soon as red flags start to pop up. Late payments, missed payments, over the limit fees, and struggling to pay one debt by borrowing from another are all warning signs that you may be getting in over your head financially.
Some folks will be able to manage their finances like this until cash flow improves, However, when unexpected expenses, separation, unemployment, or other life experiences rear their ugly head, it’s nearly impossible for struggling debtors to keep their head above water.
Don’t let this happen to you! Instead, know what to do who to work with and how to spot a scam when you educate yourself about the available choices. By following the tips in the Ultimate Guide to Getting Out of Debt, you can be debt free in no time, which will allow you to enjoy more freedoms.