Debt Relief for Bad Credit

Maybe your credit score took a dip following unemployment. Or maybe you fell behind on your bills after a medical emergency. 

No matter the exact situation, if you're struggling with debt, you deserve relief. While some kinds of debt relief may be easier to get if you have better credit, relief is available for people whose credit scores need a bit of work, too.

If you’ve got lower credit, check out these options for debt relief, so you can get help managing your debts and reducing stress.

Debt Relief Options That Don't Require Good Credit

While you may need good credit to qualify for a loan or credit card, you don't necessarily need good credit for debt relief—although credit score requirements vary significantly. Your best bet is to be open to all the options and explore different paths for tackling your debt.

Debt settlement doesn’t generally require good credit, or even fair credit. With debt settlement, your creditors agree to accept a lower amount than what you actually owe and forgive the rest. 

You can negotiate debt settlement on your own. However, negotiating with creditors can be tricky and intimidating, so consider working with a debt relief company to negotiate with creditors on your behalf. Debt relief companies have experience working with creditors, and they may be able to secure a better outcome than what you could accomplish on your own.

Another debt relief option that doesn’t always require good credit is credit counseling. With credit counseling, you work with a nonprofit advisor who can review your situation. If you qualify, they can help you create a debt management plan (DMP) in which your debts are consolidated into a single monthly payment.

One final option for debt relief that doesn't require good credit is bankruptcy. Chapter 7 bankruptcy could get rid of your unsecured debts for good if you qualify. While Chapter 7 bankruptcy doesn't have a credit score requirement, your income must be below a certain threshold to qualify for it.

Debt Settlement for Bad Credit

If financial hardship has made it impossible to pay your debts, debt settlement could be a solution. And you may find that using a debt relief company makes the process less stressful. Professional debt relief programs don't normally have any credit score requirements. Rather, they're based on financial hardship, and how much you can afford to repay. 

Here's how the process generally works, though it can differ from one debt relief company to another:

• In a free evaluation, a debt consultant reviews your circumstances.

• Together, you land on a monthly deposit amount you can afford. That amount goes into a dedicated settlement account (which you own and control). 

• Once the account is set up, your debt relief company negotiates with creditors to settle your debt.

• If you reach—and greenlight—a settlement agreement, the funds in your settlement account are used to pay the creditor.

Debt relief programs typically take two to four years to complete. Usually, the cost is 15% to 25% of the debt being settled. Any debt relief company should disclose its fees upfront. 

Debt settlement fees can only be legally collected once a settlement is reached, you approve it, and payments begin. Avoid any debt relief company that charges settlement fees upfront.

What debts qualify for debt settlement?

Usually, unsecured debts qualify for debt settlement, while secured debts don't. Secured debts mean those backed by collateral, or something of value that you own.

Unsecured debts include:

• Credit cards, including store credit cards

• Medical bills

• Personal loans

• Private student loans

• Debts in collections

• Lines of credit

• Payday loans

Secured debts include:

• Auto loans

• Mortgages

• Home equity loans and lines of credit

Secured debts typically don't qualify for debt settlement because they're tied to a specific asset. If you're delinquent on an auto loan, for example, your lender could repossess your vehicle, while a mortgage lender could force the sale of your home via foreclosure. Secured lenders are less likely to settle because they have other options for getting repaid.

Note: Federal student loans and tax debt are generally not eligible for debt settlement. However, the government offers hardship programs that may provide relief for these types of debt.

Credit Counseling and Debt Management Plans

If you're struggling with debt, you may want to work with a credit counselor on a debt management plan (DMP). Nonprofit counseling agencies commonly offer these plans without a credit score requirement. 

DMPs typically take three to five years to complete. One key benefit is that you may qualify for a reduced interest rate on your debt, making it easier to pay off. That said, your monthly payments under a DMP may be higher than the minimum payments on your current debt, since the goal is to pay off the balance in full. You also generally can't use credit cards while you're enrolled in one of these plans.

DIY Debt Negotiation

If you're looking to settle your debt, you’re not required to use a debt settlement company. You can talk directly with your creditors about repayment or settlement options. 

That said, negotiating directly with creditors isn't for the faint of heart. The process can be time-consuming and stressful. Be prepared for your creditors to play hardball and be resistant to negotiating, at least at first. Your best bet is to go in with confidence and pledge to not get thrown if your creditors push back.

If DIY debt negotiation sounds overwhelming, you may want to use a debt relief company to negotiate on your behalf. Debt relief companies have experience negotiating with creditors, and often have existing relationships with them. And those factors could lead to a better outcome.

Bankruptcy

Bankruptcy is a legal way to potentially get rid of debt you can't pay. Chapter 7 bankruptcy could be an option if you have few assets and unmanageable unsecured debts. Certain assets could be sold to pay some of your debts, then the rest of the debt is forgiven. You need to pass a means test and may not qualify for Chapter 7 if you make too much money.

If you're facing foreclosure, Chapter 13 bankruptcy could be a solution. This involves restructuring your debt, and you'll typically need to pay back most or all of your debt within three to five years.

Consult with a bankruptcy attorney licensed to operate in your state to see if bankruptcy is an option.

How to Choose the Right Debt Relief Option

There are plenty of debt relief options available to people with poor credit. The key is to choose the solution that's the best fit for your situation.

You may want to consider debt settlement if you're experiencing financial hardship and/or you don't feel you can repay your debts in full. Keep in mind that some debt settlement programs require a minimum amount of unsecured debt. Prepare to do some research to see which ones you qualify for. 

If you can afford higher monthly payments and are looking to minimize damage to your credit score, a debt management plan may be a better option than debt settlement. DMPs can generally help your credit in the long run by giving you a path to paying off all your debt. As you make monthly payments, your balances are reduced, which could boost your credit score.

When considering debt relief options, ask yourself the following:

• Do I have a steady income? If so, a DMP may work for you. If not, other options may be better.

• Would lowering the interest rate on my debt make it payable? If so, a DMP is worth considering. If you don't think a lower interest rate will make a difference, you may want to look into debt settlement or bankruptcy.

Getting Started With Debt Relief

Consider contacting a professional to get a better idea of your options. If a DMP sounds like a good fit, get a consultation from a credit counselor to see if you qualify. If you're considering bankruptcy, find a licensed bankruptcy attorney in your area.

If you decide that debt settlement is your best option, get a free evaluation. During that meeting, a debt consultant can review your debts, income, and expenses to see if you're a good candidate for debt settlement. There's no obligation to enroll in a debt relief program after your free consultation. 

Your credit scores don't have to dictate your financial future. And they're not set in stone. Deal with your debt, then work on rebuilding your credit.