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Debt relief is a broad term that describes various methods for helping people get out of debt. You might seek relief from debt if you're overwhelmed by credit card balances, loans, or medical bills. When comparing debt relief companies, it's important to consider the type of help they provide and the fees they charge.
Debt relief programs work by helping people choose the best solution for dealing with debt. Depending on the details of your situation, that might include:
Debt relief companies may operate on a for-profit or nonprofit basis. In either case, you may be offered a free initial consultation to discuss your debt situation.
Debt relief programs can help you get a grip on debt, but they're not right for everyone. There are some potential downsides to consider before seeking debt relief help.
Nonprofit credit counselors may offer debt relief free of charge, but other companies operate on a for-profit basis. This means they make money based on the fees they charge people for debt relief services.
Before paying a fee for debt relief, it's important to consider what help is being offered. It's possible to get relief from debt on your own (and save money) if you're willing to spend time contacting your creditors.
Debt relief can help you get back on track financially, but it also has the potential to hurt your credit score.
Negotiating debt, for example, is usually only an option if you're behind on payments. Late payments make up 35% of your FICO credit score. While getting relief from debt this way can help you pay less than what you owe, your scores will take a hit.
Bankruptcy can also be damaging. The higher your score before filing for bankruptcy, the bigger the drop may be afterwards. Your credit can recover from late payments and bankruptcy, but it can take time.
The debt relief industry attracts plenty of scammers looking to dupe people out of their money. You might sign up with a debt relief company and pay a fee, only for them to disappear overnight without doing anything to help you.
In that scenario, you've lost money and your debt situation isn't any better. It could even be worse if late fees have piled up because you haven't been paying on the advice of the debt relief company.
Getting relief from debt can make sense if you owe an overwhelming amount and you don't know how to deal with it. You might consider debt relief in these situations:
Juggling multiple debt payments can get confusing and put you at risk of missing a due date. Debt relief strategies can help you combine those payments into one so that it's easier to keep track of what you owe.
Some of the options for doing that include:
We'll dig into the specifics of each option a little later.
If you've fallen behind on payments, you might need debt relief to help you get caught up or negotiate an agreement on what you'll pay. As mentioned, a debt relief company could work out a plan with your creditor to reduce your rates, waive fees, or allow you to pay off the balance for less than what's owed.
Some creditors offer hardship programs for people who are experiencing a temporary financial setback. You could reach out to creditors directly to ask whether any type of in-house debt relief is available.
Best for: People who owe unsecured credit card debt and want to simplify monthly payments.
Debt management plans are structured plans for repaying debt, specifically, credit cards. You make one monthly payment to the debt relief company, which is then distributed among your creditors. You continue making those payments, typically over two to five years, until the debt is paid off.
The debt relief program may work with creditors to lower your interest rate or waive certain fees. As a condition of enrollment, you agree to close your credit card accounts so you can't add to the balance.
Best for: People who want to combine debts using a loan and have good credit to qualify for the lowest rates.
Debt consolidation allows you to combine multiple debts into one using a loan. You get an unsecured personal loan and use the funds to pay off your debts. You then make one payment on the loan going forward.
Refinancing lets you replace existing loans with a new one. For example, you might refinance private student loans or a personal loan with a new lender. Doing so could reduce your interest rate or lower your monthly payments.
Best for: People who owe unsecured debts and have fallen behind on payments.
Debt settlement or debt negotiation allows you to pay off debt for less than what is owed. There are two ways to negotiate debt: do it yourself or hire a debt settlement company.
If you're negotiating debt on your own, you'll reach out to your creditors to make an offer. Should the creditor accept, you'll make a lump sum payment or several installment payments. The remaining debt balance is forgiven.
Debt settlement companies negotiate with your creditors for you. You pay a set amount of money into an escrow account each month. Once an agreement is reached, the debt settlement company uses funds from your escrow account to pay your creditor.
Best for: People who can't pay debts at all, or want a legal process to repay debts that protects them from collection actions.
Bankruptcy is a legal process for eliminating debt. There are two primary options for consumers:
Bankruptcy is often seen as a last resort that should be avoided, but in some situations it can make the most sense. You can file bankruptcy to eliminate credit card debts, medical bills, and most loans. It's possible to get rid of student loans through bankruptcy though it's exceptionally difficult to do.
If you're interested in debt relief, there are plenty of companies to choose from. Two popular examples include National Debt Relief and Freedom Debt Relief. These companies consistently rank among the best debt relief options based on the services they provide, the fees they charge, and the overall customer service experience.
With so many options to choose from, it's important to do your research. Here are some of the most important things to consider when looking for a debt relief company to work with.
The first thing to look at is the type of debt relief services offered. Companies may specialize in one area, such as debt management plans or debt settlement, or offer a variety of debt relief options.
It's also important to consider the kinds of debt a company's clients typically have. Some debt relief programs only work with people who have credit card debts, while others cater to people with tax debts.
Debt relief companies that operate for profit can charge fees for their services. You might pay:
It's a good idea to review the fee schedule thoroughly to understand what you'll pay and when those payments are due. Be wary of any debt relief company that dodges questions about fees or demands payment upfront before services are rendered. Those could be signs of a debt relief scam.
One of the best ways to choose a debt relief company is to see what other people have to say about them. Testimonials can offer insight, but it's also helpful to read honest reviews written by people who have used a company's services.
You can check Trustpilot for ratings and reviews, as well as the Better Business Bureau (BBB). Reading reviews and testimonials can give you an idea of how satisfied a company's clients are and what they do or don't like about it.
When debt becomes a struggle, it can be difficult to know what to do. It's just as important, however, to know what not to do if you have debt that feels overwhelming.
Missed and late payments can hurt your credit score in a major way. If you're in danger of falling behind on a payment, don't just let the due date slip by.
Reach out to your creditors to ask if a due date extension is possible or whether you might qualify for a hardship program. You might be able to get your payments reduced or pause them temporarily through forbearance.
If you've missed a debt payment (or more than one), your creditors might start calling or sending letters asking for payment. It's tempting to ignore them but that could lead to additional collection efforts, including a creditor lawsuit.
When you receive a debt collection letter, you can send back a reply asking for verification or validation of the debt. You have that right under the Fair Debt Collection Practices Act.
This won't remove your responsibility for paying the debt if you owe it. But it does force a debt collector to temporarily halt collection actions until the debt is verified, which can give you time to plan your next move.
The biggest mistake to avoid when you have overwhelming debt is assuming the problem is just too big to solve. The reality is that debt relief can take many forms and there's likely at least one solution that will fit your situation.
Talking to a credit counselor can help you get some clarity on how significant your debt problem is and what you can do about it. It's also a good reminder that you don't have to navigate the process of dealing with debt alone.
Debt relief exists to help you figure out a path forward when you've got credit cards, loans, and other bills to pay. If you've tried to deal with your debt but have hit a wall, talking to a debt expert can help. Remember to do your research to find a reputable debt relief company to work with.
It's possible to do debt relief on your own without the help of a third-party company. For example, you could apply for a debt consolidation loan or negotiate a settlement with your creditors yourself. You don't need an attorney to file bankruptcy, though you might find it helpful to schedule a free consultation with one initially to decide if that's the right path for you.
Seeking debt relief can be worth it if you've tried to handle your debt on your own and aren't getting anywhere. Comparing the services offered against the fees you'll pay is a good place to start when evaluating debt relief companies.
Debt relief can hurt your credit but you can rebuild your score over time. It's possible to get credit cards or even buy a house after debt settlement or bankruptcy. The key is developing good financial habits, such as paying bills on time, and allowing enough time to pass for your score to rebound.
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