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How debt relief companies work
Debt relief could help you wipe the slate clean — as long as you avoid excessively high fees and guarantees.
When your debts build to the point where it feels like you’ll never be free, you might think that bankruptcy is your only option. However, there is another option worth considering — a debt relief company.
Debt relief companies are designed to act as a buffer between balance transfer credit cards and filing for bankruptcy. They might sound too good to be true and that’s because sometimes they are. It’s possible to find a legitimate and trustworthy company, however, you’ll need to know what to look out for.
What services do debt relief companies offer?
Most debt relief companies offer a combination of services designed to set you on a debt-free path — and keep you there.
Alternative names for debt relief
There are many other names for debt relief, and some of the practices vary slightly between each, as mentioned above. These alternative names and practices include:
- Debt settlement
- Debt relief
- Debt consolidation
- Debt arbitration
- Debt negotiation
- Debt pooling
- Debt reduction
- Debt elimination
Is it a good idea to use a debt relief company?
Unless you’re just looking to sign up for a few budgeting workshops with a credit counselling organization, the services offered by debt relief companies can be risky.
It’s not guaranteed that your creditors will agree to lower rates or payments. If you stop making payments to your creditors — as some debt settlement companies recommend — you could run into a lot of trouble, and find yourself in court.
However, there are a few situations in which you might want to consider debt relief.
Consider debt relief if …
- You’ve had a legitimate financial hardship. You might not qualify for some types of debt relief if you’re unable to prove you’ve undergone a hardship like unemployment, a medical emergency, a costly divorce, the death of a spouse or even extreme overspending.
- You can’t handle your debt, but you’re ready for bankruptcy. You’ve done the math and know you won’t be able to pay off your debt in the next five to ten years — but you either don’t qualify for bankruptcy or are worried about losing your assets.
Consider other options if …
- You’re struggling with student loans. You can’t use a debt relief company to negotiate your student loan rates set by the government. However, the government offers student loan forgiveness programs and other ways of dealing with hardship that aren’t as risky as debt relief.
- You haven’t had any real setbacks. Just tired of all your debt? Consider taking advantage of credit counselling workshops, and look into options like debt consolidation loans or balance transfer credit cards.
- You’re considering taking on new debt. If you’re able to qualify for another loan, apply for a new credit card or think you can work your way out of your debt, you aren’t ready for — and might not qualify for — debt relief.
Debt relief or bankruptcy?You’ve probably heard that bankruptcy is a last resort, and it’s true: A bankruptcy stays on your credit report for up to seven years. While the negative impact of a bankruptcy diminishes over time, your could see your credit cards cancelled, and you likely won’t qualify for tax refunds. You might even have trouble getting a job.
Debt settlement and other debt relief options might also damage your credit score and could expose you to more problems if your creditors don’t want to wait through negotiation — and take you to court instead. There’s also no guarantee it will work, making it an even riskier move. If it does, however, it might not haunt you nearly as long as declaring bankruptcy will.
Bottom line: Take caution with either option and understand the lasting impacts on your credit report to make an informed decision.
How to find a legit debt relief service
Debt relief has earned itself a somewhat shady reputation, thanks to the rise of scam companies in the early 2000s. Although there are many tell-tale signs of an illegitimate business, scammers are always creating new ways to take your money.
It’s possible to avoid a scam by doing some research. When researching a debt relief company, ask yourself:
- Does it have a good reputation? Head to the Better Business Bureau (BBB) website to see if the company has any complaints against it.
- How long has it been around? While not always the case, older more established businesses feel less pressure to engage in unsavoury business practices to stay afloat.
- What’s the website like? Can you find answers to most of your questions with a few clicks? Is it clear what services it provides, and is that information consistent? If you find yourself frustrated online, you might find more frustration with the company itself.
- How will you pay fees? Are you required to pay a fee upfront? Most legit companies also won’t ask for fees upfront or all at once, preferring steady payments toward settlement accounts and services.
How much control will you have over your money? Debt settlement companies in particular work by having you pay into an account from which the company then pays your debt settlement fee.
- Is there a minimum debt? Debt management companies shouldn’t enforce a minimum enrolled debt amount. Better debt settlement companies are willing to work with debt on the lower end — from $7,500 to $10,000.
- What types of debts does it settle? Established debt relief companies can settle specific types of loans and even some unsecured debt, but most only handle such basics as unpaid bills, personal loans and credit cards.
- What timeline does it advertise? Typically, debt settlement programs take two to four years. Try to avoid longer terms — it increases your risk of facing trouble with your creditors.
- How did you hear about them? If the company solicited you for its services, make sure advertised promises are true. Otherwise, it’s not following government regulations.
4 red flags to watch out for
It should set off alarm bells if you see a company committing any of these offences:
- It charges upfront fees for its services.
- It guarantees a specific amount of debt savings.
- It promises it can settle lawsuits and stop calls from collection agencies.
- It advertises that your creditors will agree to participate.
Getting sued for debt reliefSome debt settlement companies will tell you that once you’ve signed on for their services, it’s OK to stop paying your creditors if you can’t afford it.
This is risky advice: Not only will you continue to accrue interest and late fees on your creditors’ debt, but it’s also not uncommon to deal with ensuing calls from collection agencies harassing you about your debt.
If you don’t pay your creditors over too long a time, you could end up being sued. If you lose the lawsuit but can’t pay up … well, you could have your wages garnisheed or land some expensive fines.
Better debt settlement companies can connect you with legal services to avoid such problems, but not all do.
Remember that you’re not guaranteed you’ll win a settlement. Avoid any debt relief company that says otherwise.
I signed up. Now what?
Change your financial behaviour and change your life — for good. True debt management is about one thing: you controlling your money.
— Dave Ramsey, Motivational Speaker on Debt
Debt relief companies can only do so much — you have to make their programs work for you.
Five ways you can make debt relief worth it
- Avoid taking on more debt. It might be difficult to avoid spending if you’re enrolled in a debt relief program, but many companies require you to close your accounts.
- Watch your credit score and report. Know what to expect, and monitor your credit report for any irregularities. In general, debt settlement programs can cause your credit to take a dive. Debt management shouldn’t affect your score, but you might see a line on your report indicating you’re paying off a debt through credit counselling. Other types of debt relief shouldn’t affect your credit score or report at all.
- Continue paying your creditors. If you have the means, continuing to make at least your minimum payments to keep interest and late fees from piling up — not to mention to keep harassing calls from collection agencies or potential lawsuits at bay.
- Make sure everything adds up correctly. Do your fees match up with your original agreement? If you see anything out of the ordinary, call your debt relief company.
- Take advantage of free resources. Credit counselling agencies and other debt relief companies often provide tools to help you stick to a budget or rebuild your credit score. Use them to get back on track and identify your financial issues.
Doing it yourself
Not ready for debt relief, but can’t qualify for a debt consolidation loan? You have a few strategies to reduce your debt more quickly.
- The avalanche method. Pay off your debts by tackling the ones with highest interest first. If you don’t know what your highest interest debt is, it’s usually the one whose full balance is due the soonest. You could end up saving a lot of money — especially on shorter-term loans that build up fast if you don’t stop them quickly.
- The snowball method. Get quick wins by clearing your smallest debts first. The advantage is that smaller loans won’t get a chance to grow into bigger, unmanageable loans, simplifying your debt. However, it could cost more in the long-term than if you were to use the avalanche method.
- Negotiate with your creditors. Your debt company might tell you it’s best to leave negotiations to the professionals. However, it is possible for you to call up your creditors yourself. If your candid about your situation, they might be willing to reduce your interest rate, your principal or even settle. Be firm about what you can afford, and escalate the call until you reach somebody who can help.
Good debt management is 80% behaviour and 20% head knowledge. It isn’t rocket science, as some debt management companies try to make you believe.
— Dave Ramsey, Motivational Speaker on Debt
Debt relief encompasses a wide scope of services, from debt negotiations with your creditors to debt management tools. When looking at your options, keep in mind that most companies with relief in their names deal mainly with debt settlement. Credit counselling agencies, on the other hand, tend to specifically advertise their counselling services.
Avoid signing up with a company that doesn’t meet legal requirements — or raises red flags when you’re researching about them. Also, make sure you’ve exhausted other options like debt consolidation loans before taking any risky steps.
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