If you're having trouble managing your debt and facing the possibility of default, a debt relief company might help. Debt relief options vary, including those you can pursue independently, but a debt relief company can guide you through the process. Keep in mind, though, that their services come with a fee.
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What Are Debt Relief Companies?
Debt relief companies are for-profit organizations designed to assist you in managing and reducing your debts. Depending on the company and its services, they may negotiate with creditors to help you settle your debt for less than the total amount.
Typically, these companies charge a significant percentage of the debt they help you discharge as their fee. The services offered can vary, but standard debt relief options include debt consolidation, debt settlement, credit counseling, and debt management programs.
How Do Debt Relief Companies Work?
Debt relief companies help consumers reduce their debt or manage repayments more effectively, though they charge a fee for their services.
Most companies start with an initial consultation to assess your eligibility and determine the best approach for your situation. However, it’s crucial to be well-informed about all your options before entering this process.
Often, these companies may advise you to stop paying your debts to give them leverage in negotiating with creditors to settle a portion of your debt. Afterward, they’ll assist you in creating a plan to repay the remaining balance.
It’s important to note that charging upfront fees for debt settlement services is illegal. These fees should only be collected once your debts have been settled or resolved. If a company promises guaranteed debt settlement, it’s a red flag that it may run a scam, and you should look elsewhere.
Alternatively, you might get advice from a debt relief company on managing your debts to avoid missed payments and pay them off more quickly. However, we recommend consulting a nonprofit credit counselor for this kind of service, as they typically charge lower fees and won’t push additional services on you.
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Types of Debt Relief Programs
Debt relief might be a good option if you can't realistically repay your unsecured debt, such as credit cards, medical bills, or personal loans, within five years, even after making significant cuts to your spending.
It may also be worth considering if your unsecured debt equals half or more of your gross income. Various forms of debt relief, including debt consolidation, debt settlement, and bankruptcy, can help you manage and pay down your debt.
How Debt Consolidation Works
Debt consolidation involves taking out a new loan or another form of credit to pay off multiple existing debts. Typically, this new loan comes with a lower interest rate than the original debts, which can reduce your monthly payments.
Even if you’re not struggling with debt, debt consolidation can still be beneficial. For example, you might transfer your current credit card balances to a new card, especially one that offers a low or 0% interest rate during an introductory period. Alternatively, you could repay your credit cards using a home equity loan.
However, if you’re already deep in debt, securing new credit with a favorable interest rate, or getting approved at all, can be difficult. If you find yourself in this situation, you have several options.
One option is to consult with a reputable credit counseling agency, which can help you explore what consolidation loans might be available and discuss other alternatives. Another option is to negotiate directly with your creditors.
As the Consumer Financial Protection Bureau (CFPB) notes, "Some creditors might accept lower minimum monthly payments or adjust your due date because they would rather receive smaller, regular payments than not get paid at all."
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How Debt Settlement Works
Unlike debt consolidation, which rarely reduces the total amount you owe, debt settlement aims to pay off your debts for less than the full amount, often in a single lump sum.
You can negotiate with your creditors independently or hire a debt settlement company to assist you. However, be cautious. This field is known for fraud, as the Federal Trade Commission highlighted in its warnings about debt relief and credit repair scams.
Even legitimate debt settlement companies charge fees and can significantly damage your credit score. For example, in a debt settlement scenario, you might offer to pay a creditor $7,500 to settle a $10,000 debt, either as a lump sum or through three $2,500 installments.
It’s up to the creditor whether they accept your offer, but they might consider it if they believe the alternative is getting nothing or if they want to avoid a lengthy process to recover the money.
Remember that if the creditor reports to credit bureaus, the settled debt will stay on your credit report for seven years, potentially affecting your ability to obtain credit in the future.
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What to Look for in a Debt Relief Company?
When comparing debt relief companies, focus on three key factors: certification, fees, and repayment timeline.
- Certification: Ensure any debt relief company you consider is accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America. If a company lacks these credentials, it’s best to look elsewhere.
- Fees: Most debt relief companies charge fees ranging from 15% to 25% of the total debt enrolled in the settlement program. They might charge fees for setting up and managing the savings account used for payments.
- Repayment Timeline: Completing a debt settlement program usually takes between two to four years, depending on your total debt and the number of creditors involved. Check the company's website to ensure their estimated timeline aligns with your expectations.
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Best Debt Relief Companies
Freedom Debt Relief
Freedom Debt Relief assists with various unsecured debts, including payday loans and private student loans. While its services can be costly, as it charges a percentage fee based on the initial debt rather than the settled amount, the company offers a "program guarantee" that may reduce fees in certain situations.
They provide a free consultation to review your financial situation. Although there are no upfront fees, you must open a savings account with a third party.
Freedom Debt Relief is transparent about the associated costs: a one-time setup fee of $9.95 and a monthly charge of $9.95. While this is a higher cost for a savings account than those offered by banks, it’s not uncommon among leading debt relief companies.
>> Low Monthly Payments With No Upfront Fees! >>
National Debt Relief
If you’re overwhelmed by significant debt, National Debt Relief is a well-regarded company that may help you achieve financial relief. Since 2009, they’ve assisted over 600,000 clients in eliminating debt, even for amounts exceeding $100,000.
National Debt Relief tailors plan to your specific needs, to restore your financial stability within 24 to 48 months. They specialize in negotiating with creditors to reduce high-interest debt balances. Their service fees range from 15% to 25% of the enrolled debt, and they offer a money-back guarantee.
>> Helping People Overcome Debt Since 2009 >>
Pacific Debt Relief
Pacific Debt Relief charges settlement fees between 15% and 25% of the settled debt, similar to the top debt settlement options, although their overall rating is slightly lower. While their website mentions fees based on total enrolled debt, a company representative clarified that the fees are based on the settled debt amount, which could be more affordable.
Pacific Debt Relief has earned a strong reputation based on online customer reviews. Nearly 1,500 customers have rated them an average of 4.7 out of 5 stars, and their Better Business Bureau (BBB) rating is even higher at 4.93 out of 5 stars, based on similar reviews.
>> Over $500 Million in Debt Settled Since 2002 >>
What Is Debt Relief? – Frequently Asked Questions
Do Debt Relief Companies Charge Fees?
Yes. Debt relief companies charge fees in exchange for their services. The amount you’re charged depends on the company you work with and the relief method you choose.
Keep in mind that legitimate companies should never ask you to pay fees upfront, if you’re asked to provide this, it’s likely a scam.
How Long Will Debt Relief Affect Your Credit Score?
Working with a relief company will typically result in an immediate negative impact on your credit score. The degree to which your score drops depends on your chosen relief method and whether your creditors decide to report it.
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Is Debt Relief Good or Bad?
In most situations, debt relief isn’t something that will be immediately good for your finances. For one, it’s often a costly undertaking due to the fees charged by the companies. It also has negative impacts on your credit score.
Even as you rebuild your credit score, the forgiven debt will linger up to seven years on your report. But it may be the only way to avoid bankruptcy in some situations. Credit counseling from a nonprofit agency should also be considered when considering whether to pursue debt settlement.
How Do I Qualify for Debt Relief?
Consumers with a qualifying type and amount of delinquent debt qualify for debt relief. However, each company has different approval and minimum debt criteria.
The Bottom Line
Debt relief could be viable if you're on the brink of default or bankruptcy. However, it's crucial to vet the company to avoid red flags like upfront fees or guarantees of settlement. Remember that using debt relief services can pose risks to your credit score.
For example, suppose you ask the company to negotiate a debt settlement. In that case, your credit score will likely suffer when you stop making payments, regardless of whether the creditor agrees to the settlement.
>> Helping People Overcome Debt Since 2002 >>
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