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Debt Relief

"Debt Relief" is a general term that can refer to several types of strategies used to help ease consumer debt. The term debt relief is most commonly used in the context of personal credit card debt. In the past ten years the credit card debt relief industry has seen explosive growth and has become one of the fastest growing industries in the US. The most common strategies for credit card debt relief are debt settlement, credit counseling and debt consolidation lending. Let's take a closer look at these three strategies and the pros and cons of each.

Debt Settlement

In the case of credit card debt settlement, the process of debt settlement refers to an agreement between the credit card company and the borrower to settle an outstanding balance for an amount that is less than 100% of the total owed. There are a couple of obvious questions that come to mind regarding debt settlement.

  1. Why would the credit card companies agree to settle your debt for less than what you owe?
  2. When should a consumer consider using a debt settlement service?

The answer to the first question is pretty simple. Credit card companies will agree to settle a balance for a fraction of what is owed when they feel like they are at risk of receiving nothing. The fact of the matter is that credit card companies have no incentive to settle your debt as long as you are making your payments on time. If you fall seriously behind in your payments or stop making them all together you will quickly find that the credit card company will become more receptive to settlement. They will gladly take a percentage of the total balance if they feel like the alternative is that they are going to get nothing. As a result, it is very uncommon for someone to enter into a credit card debt settlement program unless they are experiencing severe financial hardship. If you are thinking that debt settlement may be a good option for you, the best course of action will be to get professional help from a debt settlement company. These firms have relationships with the major credit card lenders and can get you a better settlement than what you could achieve on your own. However, you must proceed with caution as the explosive growth in the debt settlement industry has brought some unsavory characters into the industry resulting in a large number of reported scams. Choose your debt settlement firm wisely. Check with the Better Business Bureau and RipoffReport.com to ensure that the firm has no or very limited consumer complaints. Also understand that debt settlement will have a negative impact on your credit. However, if you feel like you are headed toward bankruptcy, debt settlement may be a more attractive option since it will usually impair your credit for a shorter period of time than a bankruptcy.

Credit Counseling

In the context of credit card debt, credit counseling refers to the process of working with a credit counseling agency to establish a debt management plan. The credit counseling agency will establish a debt management plan with your credit card companies so that you can begin to work your way out of debt. Debt management plans consist of a reduction in interest rates on your credit cards and the consolidation of payments to several creditors into one monthly payment that is lower than the sum of your original monthly payments. Since the credit counseling agency is working with the credit card companies to get your interest rate reduced you will be able to see a significant reduction in your monthly payments. A debt management plan will usually also include the consolidation of all your monthly credit card payments into one lowered payment. Credit counseling can help consumers eliminate their credit card debt completely in 3-6 years. Although credit counseling may bring debt reduction at a slower pace than debt settlement, it will usually have a less severe negative impact on your credit rating. Of course, the credit counseling industry is not perfect. There have been thousands of consumer complaints about credit counseling agencies posing as non-profits when they really aren't. There have also been complaints of exorbitant fees charges and services never being provided. When choosing a credit counseling agency it is imperative that you do your homework. As mentioned earlier, check with the Better Business Bureau and www.ripoffreport.com to ensure that the firm you choose has a good track record.

Debt Consolidation Loans

The theory behind a debt consolidation loan is pretty simple - you pay off one or more high interest debts (usually credit cards) with a loan at a lower interest rate. The interest rate reduction results in a lower overall monthly payment and can save you a significant amount in finance charges. The recent credit crisis in the U.S. has made unsecured debt consolidation loans difficult to get unless you have very good credit. If your credit is good you can contact your bank and apply for an unsecured personal loan to be used for debt consolidation. If you have bad credit the chances are very low that you can get a personal loan from your bank. If your credit is less than perfect you may want to try a social lending site (also known as peer to peer lending). This could be a great way to get a personal loan for debt consolidation. If you are a homeowner, a home equity loan can be a great option for debt consolidation - particularly a home equity line of credit (or HELOC). Since home equity lines of credit have interest rates that are based on the prime rate they are incredibly low right now. This can provide a great opportunity to pay off high interest credit cards and save a ton of money. If you have bad credit it will be more challenging to get a home equity loan. If you can verify your income you can probably get a home equity loan but you will be limited in how much of your available equity you can use. Debt consolidation loans can be an effective way to pay off high interest debts. One thing that you need to avoid at all costs is getting a debt consolidation loan to pay off your credit cards and then running those same credit cards back up. This is a surefire recipe for financial disaster as it would cause you to dramatically increase your debt load and go from a tough financial situation to a terrible one.

Obviously, debt relief can take many shapes, as illustrated in the preceding paragraphs. Debt settlement, credit counseling and debt consolidation loans are each very viable techniques for debt reduction. When considering these options it is important to do your homework and pick a service provider that is reputable and truly has your best interest in mind. It is also important to be as patient and disciplined as possible - after all it takes a while to get into debt and you can't expect to get out of debt overnight.