Debt relief programs offer consumers a fair and workable way out of financial problems. The programs help consumers make payments they can afford, while simultaneously reducing and eventually eliminating the debt.
Sometimes the solution is asking lenders to lower the interest rate and reduce the monthly payment.
Sometimes it’s asking the lender to dramatically reduce the amount owed.
Sometimes it’s asking the lender to extend repayment terms another year or two.
Whatever form it takes, the goal of a debt-relief program is to stop the chaos, confusion and anxiety that consumers experience with overwhelming debt. Doing the right research and finding a suitable debt-relief program is a great first step toward regaining control of your finances.
Five Types of Debt Relief
There are five major forms of debt relief. Though the methods and timeframe for each one varies, it’s best to allow 3-5 years to erase the debt completely and rebuild your credit.
Here are the five options:
- Credit counseling. Sometimes debt relief is as simple as building a budget to see where money comes and goes and cutting back where there is excessive spending. Unfortunately, only 40% of consumers work off a budget. Counselors from nonprofit agencies are experts at budgeting and provide this service for free.
- Debt consolidation. Gather all your unsecured debts (i.e. credit card bills) and consolidate them into one monthly payment. If your credit score is good enough, you should lower both your interest rate and monthly payment.
- Debt management. A nonprofit credit counseling agency works with lenders to reduce (sometimes dramatically) the interest rate on your debt and lower the monthly payment to a level you can afford. Credit scores are not a factor for joining the program, but if you miss payments, any concessions you received could be terminated.
- Debt settlement. A company negotiates with your lenders to settle a debt for less than what is owed, which sounds too good to be true and usually is. Lenders are not obligated to settle and some won’t. Also, your credit report is damaged for seven years.
- Bankruptcy. This is a last-ditch choice when the other four won’t work. However, if it’s going to take more than five years to pay all your bills with one of the other four options, this is a workable solution. You get a second chance, a fresh start, and hopefully, you’ve learned enough not to repeat mistakes again.
It should be noted that not all debt-relief programs work for every consumer. The success of each program often reflects the resources, goals and commitment of the consumer. There is no one program that will solve every financial problem, so do your research and be sure you’re comfortable with the requirements and responsibilities involved with the debt-relief program you select.
It is possible to carry out a debt-relief program by yourself, but few consumers have the training and experience to do it successfully.
That is where counseling services come in.
Credit counseling agencies are nonprofit organizations who educate consumers on understanding budgets, credit, money management and how to eliminate debt.
Credit counselors interview clients to gather facts on income, expenses and debt obligations. They also do a “soft” check on credit reports to verify that the information is accurate and up-to-date.
Some of the services they provide include:
- How to develop and live on a budget
- Education material on credit reports and how they affect your finances
- How to improve your credit score
- How to manage money
- Advice on how to pay off debt
How to Find a Legitimate Debt Relief Company
A recommendation from family or friends is usually the best way to find a reliable business, but debt relief is a difficult conversation subject for most people, so that might not be the easiest route.
The safest place to go is the National Federation of Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Each organization has member companies from all over the country that provide recommendations geared to serve the best interest of consumers.
Counselors must pass training and certification process in order to work with consumers. The counselors go through a continuing education program and must be re-certified every two years. This helps keep counselors current on debt-relief programs.
Don’t deal with any credit counseling agency unless they can prove their counselors are trained and certified.
Beware of advertisements or commercials where debt-relief companies claim they can settle or eliminate your debt for pennies on the dollar. It might actually happen in very, very rare circumstances, but more likely, you are going to end up getting scammed.
The first tip that you are involved with a bogus operation is when the company asks for money up front. They want you to pay them before they do anything to eliminate your debt. That is a violation of a federal law.
Debt-relief companies can’t accept a payment until they can prove a debt has been satisfied. If a company asks you for an upfront payment, report them to the state attorney in your area or file a complaint with the Consumer Financial Protection Bureau.
Also, do not believe any “guarantee” claims made by debt-relief companies. Lenders aren’t obligated to accept a settlement offer so there is no such thing as a guarantee that your debt will be reduced or eliminated. If you hear a “guarantee” consider moving on to another company.
Another claim to watch for is a company that says it can settle secured debts. Ask for proof that confirms the claim. Debts are secured by collateral such as a home, car or boat. It’s highly unlikely the lender would accept “pennies on the dollar” when they can seize the home, car or boat and sell it to get back money that is owed.
If a debt-relief company makes suspicious claims, ask for documented proof. Don’t be afraid to challenge them. If they are honest, showing you proof won’t be a problem. Don’t dig a deeper financial hole by trusting a company who makes claims too good to be true. Verify information before you agree to do business with them.
Illegal Business Practices
The debt-relief industry took some hits in the early 2000s because of scams that got several companies in trouble with the law and prompted passage of the Telemarketing Sales Rule (TSR) in 2003. It also was a factor in the passage of the Dodd-Frank Consumer Protection Act that passed in 2010.
The Telemarketing Sales Rule, among other things, prohibits debt relief providers from charging their customers upfront fees before reducing or settling a customer’s unsecured debt.
The TSR bill was updated in 2010 and forbids companies from misleading customers on the services provided, specifically, how long the program lasts and what the fees involved will be Companies also can’t prevent customer’s from accessing the “dedicated accounts” used to build funding for attempts at settling a debt. The money in those accounts belongs to the customer and is available for withdrawal at any time without penalty.
Some of the illegal practices prohibited include banning debt relief companies from withholding access to escrow accounts used to build funds for a debt settlement and withholding information on how long it will take to get a resolution.