Many people are saddled with unmanageable debt, such as from personal loans and credit cards, and struggle to make minimum payments. As a result, their account balances continue to grow.
To regain their financial footing, some turn to debt relief. While there are various forms of the solution, they all seek to change the terms or amount of your obligation to help you repay it.
Here’s how to qualify for debt relief.
Who Is a Debt Relief Candidate?
In general, debt relief is for those who need help with unsecured debt. Here are key signs you may be a good candidate for the solution:
- You have a lot of unsecured debt
- You can barely make minimum payments
- You have a high debt-to-income ratio
- You can make debt relief program payments
- You can handle potential consequences, such as credit score damage
What Are the Types of Debt Relief and How Do I Qualify?
While there are several types of debt relief, we focus here on credit counseling, debt management, debt consolidation, debt settlement, and bankruptcy.
Credit Counseling
Credit counseling is a financial strategy that can help you manage your money and debt. Typically, credit counselors are certified and provide guidance on consumer credit, budgeting, and debt management. Some agencies offer workshops and educational materials, and depending on your financial situation, will help you set up a debt management plan.
Generally, credit counseling services are available to anyone seeking financial guidance, regardless of debt or income level. They are often free or have sliding-scale fees.
Debt Management
This debt repayment strategy involves working with a credit counselor to create a debt management plan to pay off debt more efficiently. You may also be able to get a lower monthly payment or interest rate.
Your credit counselor will negotiate with your credit card issuers or other creditors to try to lower your interest rates. You’ll make just one payment to your plan’s administrator, who pays your creditors for you.
You’ll likely have an enrollment fee in addition to a monthly fee, typically ranging between $25 and $75 for each plan account.
Debt Consolidation
With debt consolidation, multiple debts are combined into a single loan or line of credit. With this approach, you may be able to secure a lower monthly payment and interest rate, enabling you to pay off your debt more quickly.
Debt consolidation eligibility depends on the lender and the method, whether it’s a traditional loan, a debt relief program, or another option, such as a balance transfer card.
Traditional Debt Consolidation Loan
When applying for a loan to consolidate debt, some lenders may consider factors like:
- Credit history: Lenders may look at your credit score to assess creditworthiness.
- Debt-to-income ratio: This figure helps lenders understand how much of your income goes toward existing debt.
- Income and employment: Proof of regular income and a steady work history may be requested.
- Total debt amount: Some lenders may have minimum or maximum loan limits.
Other Options
There are additional tools that some consumers explore when consolidating or managing debt:
- Balance transfer cards: Some credit card issuers offer promotional APRs on balance transfers. Eligibility may depend on credit history and other criteria.
- Home equity loans: These involve borrowing against home equity and often require sufficient collateral and a solid financial profile.
As with any financial decision, it’s important to carefully review the terms and understand any risks or fees before moving forward.
Debt Settlement
With this type of debt relief, the amount of your outstanding debt is changed to help you pay it off quicker and become debt-free. Generally, debt settlement means hiring a company such as National Debt Relief to negotiate with your creditors to settle your debts for less than your actual balance.
Rather than pay your creditors, you’ll make deposits into an account that you control and is in your name. As funds build up, the debt settlement company will seek to negotiate reduced balances. Your savings funds will be used to pay your creditors the new, reduced amounts.
Debt settlement is best suited for individuals with high levels of unsecured debt and who struggle to keep up with their minimum payments. Companies generally require a minimum debt load of $7,500 to $10,000.
Debt covered commonly includes credit cards, personal loans, credit lines, medical bills, business debt, private student loans, and more. Fees vary among agencies, but National Debt Relief requires payment of up to 25% of the amount of your enrolled debt, but only after settlements have been reached.
Bankruptcy
Commonly known as the strategy of last resort, bankruptcy is a legal process through which you can erase or manage debt through repayment plans, debt elimination, or debt restructuring.
A Chapter 7 bankruptcy filing requires you to petition the court to liquidate your assets as much as possible to repay your creditors. With Chapter 13, you create a plan to restructure your obligations and repay creditors over a set period.
A bankruptcy filing can remain on your credit reports for up to 10 years, during which you might find it challenging to obtain new credit or loans. You may also be required to sell assets to repay your creditors. It’s also important to note that certain debts, including federal tax liens, alimony, child support, and most student loans, are not discharged in bankruptcy.
Bankruptcy eligibility depends on whether the filing is Chapter 7 or Chapter 13 and certain financial criteria:
Chapter 7
- Income: Your average monthly income over the last six months is required to be under your state’s median for a household of your size. If it isn’t, you must pass a “means test” to show insufficient income for debt repayment.
- Previous filings: You cannot have filed for Chapter 7 in the last eight years.
- Credit counseling: You must complete a court-sanctioned credit counseling course.
Chapter 13
- Debt limits: For 2025, debts must be below $526,700 for unsecured debts and under $1,580,125 for secured debts.
- Tax compliance: You must show proof of filed state and federal tax returns for the last four years.
- Credit counseling: As with Chapter 7, pre-filing credit counseling is required.
Debt settlement and bankruptcy can negatively impact your credit score and may have tax consequences. Always consult with a qualified financial or legal professional before proceeding.
In Summary
Debt relief can be an effective way to change the terms or amount of your obligation to help you repay it. However, qualifications vary, depending on the solution. So, make sure you choose wisely.
