- Ads for “credit card debt relief government programs” are misleading.
- The government will not relieve you of your credit card debt. However, other aid programs may be able to help you afford the debt that you have.
- Private solutions to too much credit card debt include debt acceleration, debt consolidation, debt management, and debt settlement.
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You’ve probably seen ads on television telling you that “you now have the right” to settle your credit card debt, or touting a “new government program” to help with credit card debt. The fact is you have always had the right to negotiate debt with creditors (but they are not obligated to work with you). The government will not cancel your credit card debt, but there are other ways to get credit card debt relief.
Are Government Credit Card Debt Relief Programs Legit?
The federal government offers debt relief programs for consumers struggling with different types of debt. For example, it's possible to find government debt relief for:
IRS tax debt
Mortgage assistance (for eligible loans)
State governments may also offer debt relief for unpaid income taxes or property taxes. But what about credit cards?
For most people, government credit card debt relief programs don't really exist. The Servicemembers Civil Relief Act (SCRA) offers some assistance with credit card debts, including rate caps and debt forgiveness in certain situations. However, this help is limited to those who have served in the military.
The federal government also ensures fair practices among credit card debt relief providers. These measures include:
The Credit Card Debt Relief Act of 2010 bars debt settlement companies from charging upfront fees for their services.
The Uniform Debt Management Services Act establishes guidelines for state governments to regulate credit counseling and debt settlement services. This Act also caps fees for debt management services.
These Acts offer consumer protections, but they don't necessarily ease the burden of credit card debt. While there are no government credit card debt relief programs, there are other alternatives you can consider.
Credit Card Debt Solutions
Credit card debt solutions are designed to help make your debts more manageable. There are different forms of credit card debt help, depending on the severity of your problem. Here are three options:
All three offer different avenues for managing credit card debts. Here's a closer look at how each program works.
What is debt management?
A debt management program or DMP is a debt relief solution that allows you to streamline monthly credit card payments. A credit counseling agency can review your budget and credit card debts and then create a personalized plan for paying them off.
You make one monthly payment to the credit counselor. That payment is then distributed among your creditors. Depending on the terms of your plan, your credit card companies may agree to waive fees or reduce your interest rates.
The trade-off is that you typically must close your credit accounts as a condition of your enrollment. The credit counseling agency may or may not charge a fee for their services. This debt relief option could make sense if you simply need help staying on top of your credit card payments.
What is debt consolidation?
Debt consolidation involves rolling multiple credit card balances into one, typically through a debt consolidation loan or a balance transfer credit card. A credit counselor may offer a debt consolidation option, or you can apply for a debt consolidation loan with a lender.
The proceeds from the loan are used to pay off credit card balances. Going forward, you make one payment to the debt consolidation loan. Debt consolidation could be a good fit to combine monthly payments and reduce interest rates.
You don't necessarily need to close your credit card accounts with debt consolidation financing, though you should probably stop carrying balances and accumulating more debt.
What is debt relief or debt settlement?
Debt settlement means negotiating a lower debt payoff with your credit card company. The creditor forgives or cancels the remaining balance in exchange for a lump-sum payment. The terms “debt settlement” and “debt relief” are sometimes used interchangeably.
It's possible to negotiate a debt settlement on your own, but debt relief companies can do it for you if you don't have a lump sum to offer creditors. You stop making credit card payments and pay money into a debt relief savings account. Negotiations begin when there is enough saved to offer your creditors.
Once an agreement is reached, the debt relief company facilitates payment to your creditors. It also collects a fee from you, typically between 15% and 25% of the enrolled debt.
You might consider this option if you've fallen behind on credit card payments and can't catch up. Typically, creditors won't approve a debt settlement unless the account is significantly past due. Remember that missing payments damage your credit scores.
Pros and Cons of Credit Card Debt Solutions
Debt programs for credit cards have advantages and disadvantages. The benefits or potential drawbacks vary among debt management, debt consolidation, or debt settlement options. Here's how they compare.
|Debt Management||Debt Consolidation||Debt Settlement|
|Pros||Streamline monthly debt payments Potential for fee waivers, interest rate reductions Pay off credit card debts faster||Streamline monthly debt payments Potential for interest rate savings May improve credit scores over time||Pay off debts for less than what’s owed Potential for long-term interest savings Avoid debt collection actions or bankruptcy|
|Cons||Not all creditors may be willing to agree to a DMP There may be fees involved||Getting a lower rate isn’t guaranteed Leaving credit card accounts open could be a temptation to create new debt||Forgiven amounts may be taxable There are fees involved Creditors are not required to settle|
Debt consolidation can be effective if you qualify for a loan with a better interest rate, and if you control your spending. If you're just trying to control your debt, a DMP may be the right choice. But if you can’t afford your credit card payments, debt settlement could be more appropriate.
Choosing debt settlement means that you can pay less than what's owed. Settlement might be helpful if late fees and interest have steadily piled up on your original balance. And the right debt relief service can make the settlement process easier to navigate.
Credit Card Debt Relief Alternatives
Aside from credit card debt relief programs, there are some other things you can do when struggling with credit card debt. The first possibility is contacting your creditors directly to ask if they have hardship programs.
Numerous credit card companies introduced or expanded their hardship programs in response to the COVID-19 pandemic. These programs can offer a variety of relief measures, including:
Interest rate reductions
Minimum payment reductions
Temporary payment suspensions
Whether you qualify for this type of credit card help depends on your card issuer's policies. The best way to find out if you're eligible for a credit card hardship program is to call, email or message your credit card company to see what's available.
Bankruptcy is another option for serious problems. In a Chapter 7 filing, you can eliminate credit card debts and other debts like medical bills or auto loans. (Student loans are generally not dischargeable in bankruptcy.)
Bankruptcy is a last resort way to manage credit card debts because it’s highly damaging to credit scores. A Chapter 7 bankruptcy can stay on your credit reports for up to 10 years, making it harder to get approved for new loans or lines of credit. Choosing debt relief also harms your scores, though the impact is less severe.
While credit card debt relief government programs aren't a reality for most people, there are other ways to get help. The most important thing is to be proactive in finding the right debt solutions.
If you're considering credit card debt relief programs, research service providers carefully. Check the fees and online reviews to see what other people are saying before committing to a debt relief company. Beware of any company that doesn’t give you both the pros and cons of debt settlement services. And avoid any debt settlement company that charges upfront fees.