What Is Debt Relief?
Debt relief is when a borrower convinces a lender to reduce the amount of money owed (debt) to a level the borrower can afford to repay (relief).
Sometimes that means asking the lender to lower the interest rate and monthly payments.
Sometimes it means asking the lender to dramatically reduce the amount owed.
And sometimes it just means asking the lender to extend repayment terms another year or two.
No matter how it’s done, the best debt relief programs turn a lose-lose situation into a win-win – or at least partial-win, partial-win – for both sides of the agreement. The borrower gets some relief in repaying a debt; the lender gets some or all of the money they’re owed; and both sides promise this will never happen again.
Unfortunately, history says that borrowers asking lenders for help repaying debts is a never-ending drama in the U.S. economy, especially for the 190 million adults who carry credit card debt.
American consumers added $91.6 billion to their credit card bills in 2017, which is 104% more than they added in 2009, when the bottom fell out of the American economy. The latest splurge in spending pushed credit card debt over the $1 trillion mark to start 2018.
Perhaps more disconcerting was news that the “charge off rate” – the number of people credit card companies gave up on receiving payment from – continued a 3-year trend upward, moving to 3.8% at the end of 2017.
The “charged off” debt is sold or turned over to debt collectors. They want to get paid, too.
So, what are consumers who need credit card debt relief supposed to do? Here is a look at what a debt relief company is and how they can get you out of debt.
What Are My Debt Relief Options?
There are five debt relief programs that will save you from drowning in debt, but first you must promise to be disciplined and committed to a process that could take 3-5 years.
The first three – debt consolidation, debt management and good ole’ DIY (do it yourself) – are challenging, but doable.
The other two – debt settlement and bankruptcy – are drastic and damaging, but also doable.
Here is a summary of all five:
- Debt consolidation. This typically involves taking out one loan from a bank or credit union, paying off all credit card debt, then repaying the bank or credit union in monthly installments. It also can be done with a zero-interest balance transfer to another credit card. It is a way to simplify the bill-paying process by reducing payments and having to keep up with payment dates.
- Debt management program. A nonprofit credit counseling agency will work with your creditors to lower interest rates and monthly payments to a level you can afford. If you are consistent with payments for 3-5 years, this might be the easiest route to financial freedom. It can improve your credit score and teach you how to budget effectively. Miss one payment, however, and the creditors could cancel all the concessions they made at the start of the program.
- DIY (do it yourself). The formula for DIY isn’t complex: build a budget; reduce your spending; increase your income; use the extra money to pay down the debt. The problem is forcing yourself to make paying off debt a priority, when obviously it hasn’t been. You could make it even easier by calling your card companies and asking them to lower interest rates while you pay off the debt. You must be extremely self-motivated, but along the way, you will learn a lot about finance and finding solutions yourself.
- Debt settlement. This one is tough. Instead of paying your creditors, you send money to a settlement company. When they believe there is enough in the account, they make an offer to your creditors to pay 50%-75% of what is owed to settle the debt. That often takes years. Meanwhile, your credit card debt keeps rising because of late fees and interest payments. By the time you service fees and late payments, you shave only 25%-30% off your original bill. Plus, this is a damaging negative on your credit report for seven years.
- Bankruptcy. This has a bad reputation for a good reason: the news of your financial failure follows you for 7-10 years on your credit report. The flip side of that is that Chapter 7 bankruptcy only takes six months to complete and you get a fresh start on your financial life when it’s over. If you look at all other debt relief options and don’t see a way out in less than five years, this might be your best option. It should be a last resort choice, but it’s not the end of the world. You’re getting a second chance.
Criteria for Choosing the Best Debt Relief Company
The most important criteria for choosing a debt relief company is deciding which form of debt relief works best for you. There is no one-size fits all solution that works for every consumer.
If you want to try debt consolidation, debt management programs or DIY (Do It Yourself), the starting point should be researching a nonprofit credit counseling agency. Let their counselors give you some free advice on budgeting and options to solve the problem.
Some of the things you want to look for with the credit counseling agency include:
- The agency should be certified by the National Foundation for Credit Counseling or the Financial Counseling Association of America.
- Find out what kind of debt the agency works with. All of them will deal with credit card debt, but only a few also work on student loans or medical debt.
- Visit their websites to check on fees and any requirements they may have.
- What happens if you can’t afford the fees?
- Seek customer reviews from their websites, the Better Business Bureau and any other source you can find, especially friends and family.
- Is there a minimum or maximum amount of debt required?
- How are their counselors paid?
- Do you have to sign an agreement?
- How long have they been in business?
- How long should it take to get out of debt?
If debt settlement is your preferred debt relief option, all the same considerations apply, but there are a few more criteria involved before choosing a company.
- Is debt settlement legal in your state?
- Ask about the fees for their service. Debt settlement companies are not permitted to charge upfront fees. They can’t collect any fees until they’ve settled a debt.
- Is the fee based on the original debt amount or the settled debt amount?
- What impact will debt settlement have on your credit score?
- What happens if creditors don’t accept your settlement offers?
Bankruptcy is a whole different ballgame. You definitely should hire a bankruptcy attorney.The best place to find one is to consult either the American Bar Association or the National Association of Consumer Bankruptcy Lawyers for your area.
There is no standard fee for a bankruptcy lawyer, but you should expect to pay around $3,000 for a chapter 7 case and as much as $6,000 for a chapter 13 bankruptcy.
Bankruptcy has a do-it-yourself option, called filing “pro se”, but that is strongly discouraged. It is unlikely anyone outside the legal profession would be able to handle a case pro se.
Best Companies for Debt Relief
Selecting the best of many competing companies in any industry is a subjective exercise. The results always are open for debate by both consumers and the companies involved. Your financial situation and needs differ from the consumer next to you, so you’re best off researching 3-4 companies and seeing which one best suits your situation.
Our view of the best company is shaped largely by the cost and the quality of service offered. We would expect the people searching for debt relief probably have some credit score issues and likely would in the “average” to “poor” category, meaning a credit score under 680.
Here are our choices in the five categories of debt relief we have discussed.
Debt Consolidation: The safest place to start is at your local credit union, which by law can’t charge more 18% interest on the loan, if they agree to offer you a loan. If that doesn’t work, Avant is a good choice. Avant is an online lender with interest rates as high as 36% for personal loans, but they makes up for it by catering to consumers with bad credit. They have a quick application and disbursement process that could have money in your bank in 24 hours. If you try the zero-percent transfer card route, you’ll probably need a 700-plus credit score. American Express has a card that has no balance transfer fee, which is a huge savings right away, plus 0% interest for 15 months. Debt consolidation best serves consumers with unsecured debt.
Debt Management: InCharge Debt Solutions is #1 in this category for a very important reason: They focus on finding a debt relief solution that suits the consumer’s situation, and not necessarily the company’s bottom line. You will get free credit counseling from nearly all the agencies in this field, but they make their money by steering you toward debt management plans as the final solution, sometimes bypassing settlement, consolidation or bankruptcy. InCharge counselors do a good job of discussing all options and letting you decide. Visit the company website or the client reviews from Trustpilot to see how past clients feel about the service. Debt management is aimed almost exclusively at credit card debt and is available in all 50 states.
Debt Settlement: It’s important consumers understand that debt settlement is a last-ditch choice before declaring bankruptcy. With that warning in mind, this is a crowded field with very few distinguishing marks between competitors. Almost all the companies want your debt load to be $10,000 or higher and the fees are between 20%-25% of the debt. Most admit that total savings after fees and penalties is around 30%. National Debt Relief is the top choice because it will accept clients with $7,500 of debt and is available in 41 states, the most of any of the companies. They do a nice job of being transparent about their business model on their website and have a highly-rated customer service department. The debt relief option is best for unsecured debt such as credit cards or medical bills.
Bankruptcy: It’s difficult to choose the “best” in this category because there are thousands of very good bankruptcy lawyers and nearly all of them are local. Hopefully you started the process by contacting a nonprofit credit counseling agency to be assured that bankruptcy really is the best debt relief option available. The credit counseling agency should provide you the name (or names) of bankruptcy lawyers in your area. You also can go online to find your state’s bar association, for a list. Talk to more than one lawyer and be sure they go over all the options available. Fees vary, but all fees must be posted online. It’s safe to assume you will pay around $1,000-$2,000 for Chapter 7 and $2,000-$3,000 for Chapter 13.
DIY (Do It Yourself): This one is pretty obvious. You are the best candidate to do this yourself, but fair warning: Know who and what you’re up against before making a decision. If you were an expert on financial decisions, you probably wouldn’t be in a mess with money. Do research. Ask questions. Seek advice. Set a timetable for how long this is going to take. Use your common sense. If you haven’t moved the needle in 2-3 years, try another solution.
How to Verify a Debt Relief Company
The old saying is “trust but verify” and it definitely applies to debt relief companies.
The U.S. economy is riding a nice wave in 2018, but it was only a decade ago that the wave broke and nearly washed everyone down the drain with it. Americans are great consumers, but not always great managers. They do not score well on financial literacy tests and surveys. Their lack of knowledge makes them targets for companies that know how to exploit weakness.
That was especially true in the years leading up to the Great Recession when some debt relief companies took advantage of distressed consumers and made bad situations even worse.
The result was the creation of the Consumer Financial Protection Bureau (CFPB) and a host of regulations that put checks-and-balances on what debt relief companies can promise consumers and how they can charge for their services.
Some debt relief companies went out of business. The survivors updated their tactics for helping consumers. They understand they are being watched and operate on a far more transparent and friendly basis.
Still, you should want to check on a company’s reputation. Here are some good sources:
- Ask the CFPB if there are any complaints against the company you’re considering and how those complaints were handled.
- Contact the attorney general for your state and ask the same question and whether any action has been taken by your state against a company.
- The Better Business Bureau is a source for good and bad consumer experiences with a company.
- There are consumer review websites like TrustPilot.com where people talk about their experiences and give the company a rating, good or bad. Look closely at the reviews and you will get a better feel for how trustworthy the company is.
Don’t be afraid to ask relatives or friends if they have any experience with debt relief companies. It may feel like an awkward topic, but if someone you know has turned their financial fortunes around with help from a debt relief company, it would pay to know who the company was and how they solved the problem.
Just know that even with government watchdogs and consumer review websites monitoring the industry, there are still companies making claims they can’t back up. Nobody is going to eliminate your debt problems in one quick swipe. Don’t pay for any service until you see a tangible result.
Ask for advice, but make the final decision yourself.