Debt relief refers to measures to reduce or refinance debt in order to make it easier for the borrower to repay it. Options for debt relief may entail forgiving a portion of the debt’s principal, lowering the interest rate, or consolidating several debts into a single lower-interest loan.
What qualifies you for debt relief?
As noted above, to qualify for a debt relief program, you must be able to make a monthly payment into a settlement fund, which will be used to settle with your creditors. For many consumers, this monthly payment will be lower than the total monthly payments on their credit cards. Many debt relief companies offer to negotiate with creditors, one at a time, in order to obtain the best possible terms. They are paid by charging the client a percentage of the debt that is settled for less than full payment (usually around 20%). This percentage has been criticized as being higher than lawyers charge when they represent consumers in negotiation with creditors. However, many people feel that this high fee is justified by not having to pay attorneys’ fees separately and because having just one creditor negotiation at a time will save them from feeling overwhelmed.
Is debt relief a good thing?
Debt settlement is a practice that allows you to pay a lump sum that’s typically less than the amount you owe to resolve, or “settle,” your debt. Paying off a debt for less than you owe may sound great at first, but debt settlement can be risky, potentially impacting your credit scores or even costing you more money. In a study by The Consumer Lawyer’s Group, “the Federal Trade Commission (FTC) found that debt settlement companies charge anywhere from one to 20 times their costs of services. In 2007 the FTC charged two debt settlement companies with violating federal law [15 U.S.C. § 1692d] for misrepresenting how much money consumers would save.”
Companies can get away with charging such high fees because there is no standard fee structure in place: what one company charges could be vastly different than another provider’s quote depending on who you ask and what service they are offering. That means you have to do your homework before even thinking about hiring a debt relief company, especially since most don’t provide any free consultation.
Why debt relief is bad?
Debt settlement will negatively affect your credit score for up to seven years. Once your balances have become quite high and your creditors are worried they might not see any more money from you, it’s believed they are more likely to settle your debt for less than what you owe.
So, in the end, it’s common to settle a debt for around 50% of what you owe. An example would be R10,000 worth of unsecured debt reduced to R5,000. However, your bankruptcy will also appear on your credit report and can stay there for up to 10 years or longer depending on how much money is owed and if all payments were made timely.
In addition, any future creditors may wisely choose not to extend larger amounts of credit since they’ll see this as a potential sign of financial instability based off your history of not being able to pay back smaller debts previously. Since bankruptcy requires an evaluation by a court-appointed trustee who evaluates each case on an individual basis before filing it.
What are the disadvantages of debt relief?
The primary drawback of debt relief is that there is no guarantee your debt will be reduced. The FTC warns that many debt settlement programs claim that they can reduce debts by as much as 70 percent, but lenders have no obligation to negotiate debts.There’s also the very real possibility you could end up owing more in fees than you originally owed.
Most lenders will report that your late payments to all three credit bureaus (Equifax, Experian and TransUnion) and will likely add on additional fees if you default again within a short period of time.
If this happens, it may be difficult to step back into the world of credit since lenders won’t want to lend money without verifying your salary as collateral first. This is because consumers who’ve declared bankruptcy or gone through debt relief have increased risk factors associated with their profile due to changes made in the Fair Credit Reporting Act .
Debt settlement programs are also risky for people who don’t keep an eye on their creditors regularly.
Why is debt relief important?
Debt is a major development issue. There is widespread support for lifting the burden of debt from the poorest countries. Debt relief frees developing countries from their debt service payments. They can then use these savings to contribute to poverty reduction. This is central to the figure below that shows how debt relief frees up resources for spending on education, health care and social services. The studies below reflect a broad consensus across a wide range of views about how best to tackle poverty reduction.
Most developing countries are still indebted from their massive borrowing in the 1970s and 1980s. Many cannot afford to pay even relatively low interest rates on these loans, because they have no way of raising tax revenue at home . They must spend scarce foreign currency reserves – held by governments or otherwise – on servicing past debts amounting to $130 billion today. For example: if our government has borrowed money it must pay back with its own currency which you then use to buy things from abroad.