With unsecured debt at record-high levels, it seems like debt is inescapable. And with mass redundancy and living wages not being able to meet our needs, many of us will be looking for a way of getting some help with our debt.

One way to get help with paying off your debt is to use a debt relief program. But what is a debt relief program? And how might a debt relief program affect your credit? 

Debt relief program – the basics

First of all, let’s go through what a debt relief program actually is. A debt relief program is a way to clear your debts. It’s usually best suited to someone who has a lower income and relatively few assets (mainly belongings of value, like a car or a house). 

If you meet these criteria, a debt relief program might be a much cheaper and simpler way to sort out your bills than wrestling with the rather frightening reality of bankruptcy. 

Next steps

The program is usually agreed to via a 3rd party, such as a debt settlement company, and what happens is that you agree with the original creditor to pay off a lump sum straight off the mark towards the debt you owe. This is usually lower than the total sum of the debt itself. You then pay a specific amount to the program each month.

Sounds like a great idea on paper, doesn’t it? You get away with paying a lower, single, monthly payment, and you may actually end up paying less than you initially owed on the account. All great, right? Well, there’s a little more to debt relief programs than meets the eye.

Debt relief programs – what they don’t tell you

We all want to clear our debts as soon as we can. No-one wants to be hounded by companies asking for money to be paid back, sometimes asking for extra interest and adding charges to the final amount. While a debt relief program might seem like a literal relief, there’s a few negatives.

Fees

You might be wondering how debt settlement companies make any money from helping you recoup your debt. Well, they add on interest to your monthly payments, and often extra charges too. 

While these fees are typically included in your monthly payment, there’s often no indication as to how much they are, unless you make a request about it. This could mean you are paying off your debt via a debt relief program for much longer than you expected.

Taxes

Occasionally, if you manage to negotiate with the original creditor for a lower amount for your debt, the amount you negotiate down to might be liable for taxation. This is similar to receiving fees from the debt relief program, and it could end up being an additional cost on top of the debt settlement company’s fees and charges, meaning you could owe much more than you thought you would.

Credit

One of the biggest and most frequently-asked questions is how does a debt relief program affect your credit. Well, it’s not good news on the credit front. Once you enrol in the program, the debt settlement company will tell you to stop your payments to the original creditor while they negotiate with them. 

The purpose of this is so that the creditors will be more accepting of a token payment and might negotiate a lower amount so they at least recoup some funds.

If you cannot afford to pay anymore, and your creditor is refusing your token payment offer then use our free letter template.

However, as this goes on, the creditors could continue to report these late payments to the credit reference agency. This will continue until the amount is paid in full.

Debt relief programs and credit – how long will it last?

Some programs will state that the mark next to your name on your credit won’t last that long, or that they can get them lifted and removed. They often say that you can improve on your score now you are debt free, and that it is better to have this on your credit than bankruptcy. 

While it is better to have a debt relief program record on your credit file than it is to have a bankruptcy, you would hope that this is the case, as bankruptcy is the absolute bottom of the barrel in terms of credit.

6 years

Once you are debt free, and you find yourself wanting to get credit from other lenders, you may have a tough time if you have used a debt relief program. It will stay on your credit file for up to 6 years, and it will basically prove to any potential lender that you have failed to meet payments towards another line of credit in the past.

You may also find it tricky to finding a new home, as private landlords and letting agents will conduct credit check when you apply for a tenancy. If you’ve been a recipient of a debt relief program, this will pop up on your credit report, and you may be turned down or even charged a higher rate.

FAQs

Hopefully that answers the question as to how does a debt relief program affect your credit. Below, we’ll go through some of the more commonly-asked questions about how a debt relief order affects your credit.

Can I apply for additional credit if the debt relief program is still active?

Yes you can, but you are obliged to tell the lender about the debt relief program if the amount is over £500. 

Do I have to pay for a debt relief program?

Often you do have to pay for a debt relief program. For a debt relief order for instance, which is one type of debt relief program, it costs £90, which is paid to the Insolvency Service.

Are there any other websites that could offer me advice?

If you’re looking for any additional guidance or advice with your debt or your debt relief plan, or you’re still confused about how a debt relief plan affects your credit, there are lots of companies and charities offering free and confidential advice. The best known services include:

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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