There are several different types of debt relief programs that can aid individuals in paying down and eliminating debt. The first part of these programs, which helps to determine what will work best for each individual, is credit counseling, which can aid some in managing their debt on their own. In some cases, debt management may be used to help reduce interest rates and to consolidate everything into one monthly payment. Individuals may choose to try debt consolidation, in which all of the debts are paid back in full, or a settlement in which only a portion of the debts are paid back.
Credit counseling is offered by a variety of nonprofit organizations, banks, and even insurance companies. With these types of debt relief programs, an experienced credit advisor sits down with an individual or family and goes over the types and amount of debt owed. The counselor will also typically discuss the individual’s or family’s current financial situation outside of the debt to help determine what type of debt relief programs will work best. This program is often free, although most other types of debt relief programs are not.
In many cases, credit counseling may give way to debt management, which involves an experienced credit or financial advisor helping an individual or family to work out a debt repayment plan based on debt and income. The counselor will then contact all of his or her client’s creditors and attempt to have the creditor lower his or her client’s interest rate and monthly payment amount based on the client’s finances. Once a basic payment is set up with each creditor, that amount is combined and the counselor or his or her agency adds a fee, and then adds all of the amounts up to a total monthly payment. The individual or family will then pay the agency the required amount, and the agency will then pay each creditor for its client.
Debt consolidation is one of the most popular types of debt relief, and is typically used for people who have not yet defaulted on the debt, or who have only recently defaulted. In this type of program, all of the debt is combined into one, and monthly payments are set up. This is done by taking out a loan to cover all of the debt and using that amount to pay off past debts. Then, payments are made to the new loan. This is often useful for reducing interest rates and lowering a person’s monthly payment while still paying down the debt in a reasonable amount of time.
Once a person has significantly defaulted on his or her loans, or if he or she is not financially capable of paying back his or her debt, a settlement is a common type of debt relief. In this case, the amount owed is reduced by the creditor, and is typically based on a one-time payment by the debtor. Some companies may also reduce the amount owed by a certain percentage, and accept monthly payments until the reduced amount is paid back, forgiving the rest of the debt.