What is debt relief and how does it work? (2024)

What is debt relief and how does it work?

Debt relief can take a number of forms, including reducing the debt, lowering the interest rate on it, or extending the period for repayment, among others. Creditors are often willing to consider debt-relief measures when the alternative is total default by the borrower.

What is a debt relief order and how does it work?

A Debt Relief Order (DRO) is a solution to deal with personal debts you cannot pay. You apply through an approved debt adviser and have to meet certain eligibility criteria. A DRO normally lasts 12 months. If approved, you stop making payments towards the debts (and interest) listed in the DRO during that time.

What does it take to qualify for debt relief?

You'll typically need good credit and income to take out a debt consolidation loan or balance transfer credit card, for example, while most debt settlement companies require you to enroll at least $7,500 or $10,000 of debt to qualify.

Does debt relief hurt your credit?

Debt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose.

Is debt relief program legit?

Some debt relief companies are scams, and even the legit ones are risky and expensive. Some creditors refuse to work with debt relief companies, and even when it's successful, debt relief can do major harm to your credit and raise your income tax bill.

What happens if you apply for debt relief?

Debt relief through debt settlement

Debt settlement companies typically ask you to stop paying accounts you enroll in the plan and instead put the money in an escrow account. Each creditor is approached as the money accumulates in your account and you fall further behind on payments.

What are the disadvantages of debt relief order?

Your debt relief order will appear on your credit file for six years. This may affect your ability to get credit in the future. You can't promote, manage, or set up a limited company, without permission from court. Also, you can't act as a company director, without getting permission from court.

What happens after 12 months of a debt relief order?

Once a DRO has been approved

This is called the DRO period. We will inform you and all the creditors listed in your DRO that it has been approved. During the DRO period you stop making payments towards the debts and interest listed in the DRO. After the 12 months, you will then not have to pay these debts anymore.

How long are you blacklisted after a debt relief order?

A DRO stays on your credit file for six years from the date it is approved. It may be hard to take out credit during this time.

When should you apply for debt relief?

How to pay off $10,000 credit card debt?

Can anyone apply for debt relief?

Anyone who is having a hard time making their credit card payments may qualify for debt settlement programs. However, some companies require borrowers to have a specific amount of debt — like $10,000 — to qualify for their services.

Can I still use my credit card after debt settlement?

Paying off your credit card, whether it's with a debt consolidation loan or not, does not actually cancel the card. While it does bring your balance down to zero, the card will still be open and active.

Can I buy a car after debt settlement?

Yes, auto loan lenders don't exclude those who have gone through bankruptcy. However, you'll pay higher interest rates if you finance the vehicle after receiving a bankruptcy discharge.

Can I buy a house after debt settlement?

How Long After a Debt Settlement Can You Buy a House? There's no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender's requirements on the issues raised above (credit score, DTI, employment and down payment).

Does debt relief need to be paid back?

Debt relief solutions require consistent, on-time monthly payments — often for years, and unfortunately, many people don't complete the programs. Before starting any debt relief program, make sure you can commit to it. Otherwise you'll still have debt to repay and you may not get the fresh start you're hoping for.

How can I get rid of my credit card debt without paying?

Bankruptcy is your best option for getting rid of debt without paying.

How much does it cost to use a debt relief program?

While debt settlement can potentially help you save a significant amount of money, the associated costs should not be overlooked. These fees will typically range from 15% to 25% of the total enrolled debt — but can also vary based on the company you choose to work with.

Why not to do debt relief?

Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you. Unless the debt settlement company settles all or most of your debts, the built-up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.

What is the best debt relief program?

What debts are not included in a debt relief order?

Debts excluded from a debt relief order

Debts to the Child Maintenance Service. Social fund loans. Criminal fines (including debt incurred under the Proceeds of Crime Act) Claims against you for damage or personal injury.

How long does debt relief stay on your credit report?

As with most other negative credit report entries, settled accounts stay on your credit reports for seven years.

What is the difference between debt relief and forgiveness?

It's also important to note that debt forgiveness differs from debt relief, which involves reorganizing debt to facilitate repayment—but doesn't cancel the debt. Continue reading to learn more about debt forgiveness and explore different options that you may qualify for.

Can I do debt relief myself?

You can hire a debt settlement company who will negotiate with your creditor for a fee, or you can cut out the middleman and do it yourself. Debt settlement is commonly used when the borrower can no longer afford the high interest on credit card debt, coupled with the amount owed.

Do I have to include all debts in a debt relief order?

If you forget to include any debts in your DRO you can't add them after. If any missed debts would have taken you over the £30,000 limit then your DRO might be cancelled. It's important that you tell the DRO adviser about all of your debts.