What you need to know about debt relief
Consumer credit expert Erica Sandberg, host of the weekly video podcast Do it in San Francisco broadcast on KRON-4, recently spoke to Investopedia to share his perspective on the topic of debt relief in a post-pandemic world.
Sandberg’s experience as a Budget and Debt Advisor at the Consumer Credit Counseling Service in San Francisco has prepared her for this broad discussion about debt, which includes advice and strategies for anyone in or near. a debt trap. Our edited conversation follows.
Defining debt relief
Investopedia: What is debt relief and when does debt relief become an option for someone in debt that they can’t handle?
Sandberg: In general, debt relief refers to a reduction or cancellation of a consumer’s legitimate financial obligations. To be eligible, accounts are generally overdue and / or in collection.
Investopedia: What is the difference between debt consolidation and debt relief?
Sandberg: Consolidation combines all of your debts on one account with one payment. Payments are consolidated but your debt is not reduced. There are several ways to consolidate debt. This can be done through a non-profit organization such as a consumer credit counseling service, where you close your accounts and then make a one-time payment to the agency, which distributes it to your customers. creditors.
You can also consolidate your debt with a new loan or a new credit card. With a loan, you take out a fixed amount of money that is sufficient to meet the unpaid debts. The advantage is that the interest rate is lower than it was on the original debts, and the single account is easier to manage than several. You also convert the revolving balances into an installment loan, which can help your credit report and your credit scores.
Debt consolidation is also possible with a credit card with balance transfer. As long as you qualify, you can transfer balances from other credit cards to a new card and, in many cases, receive 0% APR for a fixed number of months. In all of these scenarios, you would pay the entire balance owed.
Debt relief or settlement, on the other hand, is a process in which you would pay less than the amount owed, often in a lump sum.
About debt collectors
Investopedia: What’s the best way to deal with debt collectors?
Sandberg: First of all, with legal knowledge. The Fair Debt Collection Practices Act is very specific about what a debt collector can and cannot do.
Second, with personal responsibility. When you buy financial products, you sign an agreement; the role of the lender is to lend, the role of the borrower is to repay. Do your best to meet your end of contract. When communicating with collectors, stay calm. Be factual. It’s a business, not a personal one.
Impact of Debt Relief on Credit Ratings
Investopedia: What is the impact of debt relief on your credit score or general creditworthiness?
Sandberg: If you receive a formal pardon, it usually shows up on your credit report as settled. It’s better than not paying at all, but it’s still an indication that you haven’t fulfilled your contractual obligation. Defaults, write-offs and accounts that have been sent to collections show up on a credit report for seven years. These dings will not be purged when you settle the score.
Investopedia: Are there ways to minimize the negative impact of participating in a debt relief program?
Sandberg: If you are going to do it, do it quickly. The longer you delay, the longer you will have to wait before it gets removed from your credit report.
Investopedia: How Does Debt Relief Compare to Bankruptcy?
Sandberg: A Chapter 7 bankruptcy is a clear indication that you have cleared your debts in court. This is usually the worst thing that can happen to credit reports and scores that are derived from the information on the reports. Proof of a collection account that you have settled while paying your other accounts on time and in full will have much less impact.
“Debt settlement and bankruptcy are not as bad as always having unresolved debt, because both mean you can use your income for new purchases.” – Erica Sandberg
Where to look for debt relief
Investopedia: Where should people go to seek debt relief?
Sandberg: If you want to settle your debts, you can do so without a third party company. You can negotiate a reduced sum yourself. But if you want to hire, look for debt settlement companies that have a great reputation.
Don’t choose a debt settlement company that comes to you without your doing your research. Read about other people’s experiences with the business. Some have thousands of positive reviews, while others are much lesser known or have bad reviews.
Investopedia: What Are the Typical Fees Charged by Debt Relief Companies?
Sandberg: Most charge a percentage fee (usually 15-20%) of the amount that has been handed over. If they eliminated $ 5,000 and charged 20%, your fee would be $ 1,000.
Investopedia: Who protects consumers from unscrupulous debt relief companies?
Sandberg: The Federal Trade Commission enforces federal consumer protection laws, including those that prevent fraud, deception, and unfair business practices.
Impact of COVID-19 on Debt Relief
Investopedia: How has the pandemic affected the need for debt relief in general?
Sandberg: Many people fell behind on their consumer debt during COVID because they couldn’t work normally. The good news is that credit card companies have stepped up to help. Almost all of them provided hardship plans to people who were negatively affected by COVID, so the accounts remained in good standing even though they were technically behind schedule. This prevented accounts from going to collection agencies for non-payment.
Investopedia: What types of COVID-related debt relief (public and private) are still available?
Sandberg: On the government side, the CARES law and the US bailout law have helped with stimulus packages, discounts, increases in unemployment and easing some credit problems.
In private, consumers are always free to independently develop a plan with their creditors, but also to seek out private debt relief companies that help them solve their debt problems.
Investopedia: What do you think is the long-term impact of COVID-19 on debt and the need for debt relief?
Sandberg: COVID has shown that credit card companies and other lenders can come together and help people in difficult circumstances. Accounts don’t always have to go to collections. It would be great to see this flexibility continue.
Investopedia: Speaking of which, do you think this “goodwill” on the part of banks, credit card companies and other lenders will continue after COVID-19?
Sandberg: It’s possible. There was a feeling of “we’re in the same boat” during COVID that created some loyalty to some financial institutions, according to many credit card holders I’ve spoken to.
Investopedia: What is your message to people with high debt?
Sandberg: Remember, when you borrowed the money, you agreed to pay it back according to the contract. A creditor doesn’t have to give you a break, even if you have a good reason for needing it.
That said, all a creditor wants is to be repaid. When an account goes into collections, they lose money. Try to work with a creditor before the debt gets worse.
Keep in mind that this is an agreement between two parties, the lender and you. They have respected their end of the bargain. They loaned you the money. When you fail to meet your goal, you have violated the agreement you made with the lender. Yes, there are things happening that are beyond your control that are not your fault. They are also not the fault of the lender. Remember, you are not a victim and the lender is not the enemy. Borrow with it all in mind and negotiate with it all in mind.
Investopedia: Having said that, in your opinion, what should be in the area of debt relief?
Sandberg: There should be more incentives to help people get motivated to pay their bills. If they don’t get a positive credit report boost, that removes a lot of the motivation.