What is Debt Relief?
Debt relief is when your debt is forgiven either partially or fully. In short, the debt is written off. It means that the creditor accepts less payment than what you initially borrowed. Debt settlement, therefore, involves a debt settlement company that acts as a negotiator to reduce the amount of money owed.
You can pay half the amount and the other half is not charged. The debt is then paid in a lump sum. You get to deposit some money on a monthly basis until it is enough to cover the debt. It is a way of setting the bill and it takes a specific amount of time. This varies according to the type of debt you have. You might need a lawyer for the process to be easy and quick.
When is Debt Relief Relevant for You?
Contemplating on debt consolidation is not simple. Nevertheless, it can be the only option you have left. It is relevant for you if the debt equals half your gross income. The unsecured debt can also be more than your income. At this point, debt settlement will get you out of the tough situation.
You can resort to debt relief if you have no other way of repaying the amount you owe. This means that you are even struggling to make ends meet. You might have cut the budget on spending but still, you can’t raise the required money. Then, debt consolidation will help you out.
Disadvantages of Debt Relief
There are drawbacks associated with debt settlement. Although it can be a debt solution, it has its limitations.
– It damages the credit score
Your credit rating will decline. You will find a difficult time applying for a loan or mortgage and credit cards. You will be financially hurt. The credit score will drop by about 65 to 125 points.
– Interest and penalties pile up
When you fail to deposit the amount, you will be charged for late payment. Penalties will be the most disadvantageous part of the process. Interest will also be a part of the debt settlement.
– The high cost of debt relief fees
Companies charge a high amount to negotiate on your behalf. This means that you will dig deep into your pocket to pay them. The fees can be from $500 to $3000 and more. They charge 20% to 25% of the final debt settlement.
Debt relief is vital to get rid of debts. In spite of that, some limitations are also linked to it. Three are additional fees while paying off the debt like interest and penalties. This can be straining financially. If you decide to get debt relief, do in-depth research on the best companies.