When Debt Relief Is Not the Best Option for You

Debt relief programs are no less than lifelines for people struggling with debt and other financial obligations. It’s absolutely true and these strategies do come with real benefits but only in certain situations. They aren’t always the right option for everyone. In fact, if you opt for debt relief solutions at the wrong time or choose the wrong strategies, it can wreak havoc on your financial situation leading you to higher costs, legal risks, and credit damage. 

Today, in this comprehensive guide we’ll be explaining to you when debt relief isn’t the right option for you, its potential downsides and what other alternatives should you consider instead. 

What Is Debt Relief?

Debt relief is a broad term that includes different strategies that are devised to help people stuck with overwhelming debts. These programs can help reduce, eliminate or restructure your debts as per your financial picture. Some common strategies are:

• Debt settlement
• Debt consolidation
• Bankruptcy 
• Debt Management Plans or Credit counseling 

All these methods come with significant benefits but at the same time, they do have consequences that you must be prepared for. 

When Debt Relief Isn’t Suitable For You

Here’s when debt relief may not be best for your financial situation:

1-When You Can Still Afford The Payments 

If you can still afford to make minimum payments consistently while managing your day to day expenses then debt relief might not be the best option for you. Most of the debt relief programs require you to stop making the payments to your creditors in order to save for the settlement fund. This can lead to penalties and late fees, it can increase the interest charges and in the long run it can severely damage your credit. 

If your situation can be managed with some budget adjustments then it’s best to stick to that plan because sometimes debt relief can do more harm than good. 

2-When Your Credit Score Is Your Priority 

It’s important to first learn who should consider debt relief before making such a crucial decision. Sometimes, it’s not the best fit for your financial situation as it comes with severe consequences, especially credit damage. Bankruptcy and debt settlement can damage your credit scores on a whole other level and it can remain on your credit report for years. For example, Chapter 7 bankruptcy can stay on your credit report for 10 years and debt settlement accounts are marked as “Settled” or “paid less than full balance”. Such negative notations can really affect you in the long run.

You need to have a good credit score if you want to buy a home, apply for business financing or seek employment that requires a credit check. If these are your future financial goals then you must keep your credit in a good standing. 

3-When Most Of Your Debt Is “Secured”

Debt relief programs are only for “unsecured debts” like credit cards, medical bills or personal loans. Debt relief programs won’t work for you if most of your debt is secured (mortgage, car loans etc). When you fall behind on your secured debt, you can end up losing your assets, it can also lead you to foreclosure or repossession. In such situations, it’s best if you try negotiating with your creditors directly instead of trying debt relief. 

4-When You Have A Relatively Small Amount Of Debt 

For debt relief programs, you need to have a significant amount of debt, around $7000 to $10,000. If it’s a small amount of unsecured debt then you must not try debt relief as it comes with severe credit consequences and it’ll do more harm than good. For smaller amounts, you should cut down unnecessary expenses, make a budget and build an emergency fund to manage your debt. 

5-When You Have A Stable Income 

Debt relief is typically for those individuals who are facing a serious financial hardship like loss of job, any medical emergency or general income instability. If you have a steady and reliable income coming every month and if you have the ability to increase your earnings then you should try repayment strategies instead of opting for debt settlement or bankruptcy. In such situations, it’s best if you work on generating some extra income through freelancing, take a side gig or choose a different career that pays well. 

6-When The Fees Outweights The Benefits 

Debt settlement and debt consolidation comes with high fees. You’ll have to deal with enrollment fees, monthly maintenance fees and origination fees or loans. In some cases, you might end up paying thousands in fees and that’s the money that could have been used by you to pay down your principal. Before you sign any agreement, it’s important that you first calculate the total cost of the program, the completion time, the impact on interest and tax implications in case of debt settlement. 

7-When You Haven’t Tried Negotiating Directly With Your Creditor

Sometimes, simple negotiation can help because most creditors are willing to lower the interest rates, waive the fees or they simply offer hardship programs to those who can’t afford to make their payments due to some financial difficulty. Direct negotiation can save your credit score from decreasing but if you opt for formal debt relief, it can do much damage to your overall report and score. 

What Are Some Of The Best Alternatives To Debt Relief?

If debt relief isn’t right for you then you should try other alternatives including:

• Restructuring your budget 
• Create a side income 
• Refinance all of your high-interest loans 
• Opt for balance transfer credit cards 
• Financial coaching 
• Non-profit credit counseling

Final Thoughts 

Yes, debt relief is a powerful financial tool but it’s not a universal solution. If you are an individual with a stable income along with a strong repayment potential then it’s best to stick to a budget and avoid any unnecessary expenses until you are out of debt. Before you commit to any debt relief program, it’s important that you go through real debt relief success stories in order to gain complete knowledge about how the process works and how much time it takes. 

FAQs