Even though this article is written with seniors in mind, they’re not the only ones having problems getting by financially, let alone having enough money to build an emergency fund or to stash money away for a small get away.
However, small increases in social security payments that don’t match rapidly increasing prices, has too many seniors leaning on all kinds of debt to make ends meet. Easy to obtain credit card debt, with high interest rates, and minimum payments options, has balances booming and no realistic way for seniors – and others – to ever pay them off.
If you’re in this situation, you may be wondering, “is there any way to get some relief?’’
Yes there are a number of programs out there designed to help those burdened by death, but be careful, there are a lot of scammers out there who will take advantage of you, take your money, and do absolutely nothing that helps.
First lets begin by describing legitimate debt relief programs and how they work.
Debt management: Working with a credit counselor, you create a debt management plan, that rolls multiple credit card bills into one monthly payment with lower interest rates and fees.
Debt consolidation: When you consolidate your debt, you’ll typically take out a new loan at a lower rate to pay off your existing credit card debt.
Debt settlement: Debt settlement programs (also known as debt forgiveness programs) negotiate with creditors to reduce your overall balance, typically by 30% to 50%.
Credit card hardship programs: Many credit card companies offer hardship programs that can reduce or suspend payments for a set period or temporarily lower your rate and fees to make your card debt more affordable.
Here’s a deeper dive into each of these programs.
Debt Management
A debt management plan is a type of financial product offered by credit counseling agencies that can help you pay off unsecured debts, like credit cards and personal loans. Secured debts — such as mortgages or car loans — and student loan debt aren’t covered.
A debt management plan lumps your debt payments into a single payment, reduces your interest rates and gives you a structured path to pay off the debt over three to five years.
How Does a Debt Management Plan Work?
Once you enroll in a debt management plan, a credit counselor will contact each creditor to notify them of your debt management plan and make itself the payer on your account. The counselor may seek concessions from each creditor, which can include lower interest rates and monthly payments or no late fees.
Each month, your payment will go electronically to the counseling agency, which then pays your creditors on your behalf.
You’ll likely pay an enrollment fee as well as a monthly fee for each credit account in the plan. Fees vary between agencies, but they typically range from $25 to $40. Even with fees, your overall monthly payment should be lower.
As part of the debt management plan, you’ll need to close any enrolled credit accounts, though you may be able to leave one account open for emergency expenses. You won’t be able to open new lines of credit while you’re enrolled in the plan.
Where to Get a Debt Management Plan
Debt management plans are offered by credit counseling agencies. Look for an agency that’s a nonprofit and accredited by the National Foundation for Credit Counseling.
Expect a credit counselor to go over your financial situation thoroughly and to discuss several options, not just a debt management plan. Don’t feel pressured to sign up the same day any program is offered. Take time to think about it.
Debt Consolidation
Debt consolidation is a process in which you combine multiple debts into a consolidation loan. This is a single loan that rolls all of your prior debts into one loan, resulting in one monthly payment at one interest rate.
Consolidation loans are offered through banks, credit unions, and online lenders — and all of your debt payments are made to the new lender going forward.
Consolidating debt in this way can relieve the stress of having to juggle multiple debt payments each month. A consolidation loan may result in a lower total monthly payment or a lower average interest rate on your debt. Whether you’re able to save money on interest over time may depend on the length of the loan repayment term and/or whether you pay any fees for the loan, such as application or origination fees.
A debt consolidation loan may be secured or unsecured. Secured debt consolidation loans require you to use one or more assets as collateral, such as your home, car, retirement account, or insurance policy. For example, if you take out a home equity loan to consolidate debt, then your home would secure the loan.
Although similar to a debt management plan in that you have one payment and hopefully at a lower monthly rate, debt consolidation is something you set up and manage on your own. Because of that, sticking to the plan is also totally up to you. If you need lots of structure, this might not be for you.
Debt consolidation could help improve your credit score if you reduce your credit utilization ratio.
Debt Settlement
Debt settlement utilizes a different strategy. When you settle debt, you’re effectively asking one or more of your creditors to accept less than what you owe — known as a discounted payoff (DPO). If you and your creditor(s) reach an agreement, then you will pay the settlement amount in a lump sum or a series of installments.
The advantage of debt settlement is that you can eliminate debts without having to pay the balance in full. This may be an attractive alternative to bankruptcy, although it will also have a damaging effect on your credit history.
Keep in mind that creditors are under no obligation to enter negotiations or accept your offer. Additionally, offering a settlement requires you to have cash on hand to pay agreed-upon amounts. If you don’t have the cash to negotiate with, then seeking a debt consolidation loan may be the better option.
Typically, creditors will only consider debt settlement for accounts that are significantly past due. Therefore, if you’re still current on your balances, then this may not be an option. However, if you’re not already behind on your payments, this isn’t a reason to fall behind. Instead consider a consolidation or management program.
After a debt is settled, it’s gone — the remaining balance is wiped clean. However, with unsecured debts such as credit cards, you risk having your account closed completely after the settlement is made because the lender will not want to continue to grant you credit. This, along with any late payment history associated with the account, could cost you credit score points.
If you aren’t comfortable with negotiating debt settlement on your own, then you can hire a debt settlement company to do so on your behalf. Be aware that this will likely involve paying a fee, and can take years to complete. Contact the Federal Trade Commission or the National Consumer Law Center for free information on debt negotiation and debt negotiators.
Credit Card Hardship
Hardship programs aren’t widely advertised — not all issuers offer them — and enrolling in one may still have consequences for your account and your credit scores. But if you need help, it may be an option.
A credit card hardship program is typically a payment plan that you negotiate with your card’s issuing bank. The bank may waive fees and/or lower interest rates over a specific time frame — often a short-term period such as three months or longer.
Terms vary depending on the financial institution, the circumstances of your hardship and the deal you agree to.
Note that different kinds of hardship programs exist for different products, including mortgages, student loans, personal loans and more. Banks may even refer to them by different names such as an “assistance program” or a “hardship case,” for example.
Circumstances That May Qualify For A Hardship Program
Every hardship is taken on a case-by-case basis. Some examples of hardships that might qualify include: a pay cut, unemployment, serious illness, family emergency, divorce or natural disaster.
How to Apply for a Hardship
Before you call your lender, do a revised budget and make sure you clearly understand how much you’ll be able to pay. Then call the number on the back of your card and tell them you want to talk to someone about a hardship case.
They’ll probably transfer you and it may take a while to work through this once you get someone on the phone, but be patient and polite.
Most of all, make sure you only agree to something you can afford. If it doesn’t work for you, agreeing to their offer is a bad move. Look at other options.
In addition to meeting hardship requirements, you might have other hurdles to clear, depending on the issuer, such as:
- Proving your hardship, which may require documentation.
- Meeting with a credit counselor or completing a debt management program.
- Signing an agreement.
- Setting up automatic withdrawals from your bank account.
Sources: NerdWallet, Bankrate.com, CNBC & CBS