How debt relief companies work

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.

• Debt management

  With a debt management plan, a credit counselling agency negotiates with your creditors to lower your interest rates or monthly payments. You agree to begin paying off your debts through the agency in one or more affordable monthly payments — usually over three to five years — while the agency continues to pay your creditors on your behalf.

  Intended for credit card debt, it’s a reasonable option if you don’t qualify for a debt consolidation loan or a balance transfer credit card.

• Debt settlement or negotiation

  Considered a more serious option, debt settlement or negotiation companies connect you with a specialist who will negotiate with your creditors to reduce the amount you owe in exchange for a one-time payment. The agency pays off this negotiated amount, and then you repay the agency through monthly payments over a set number of years.

  Legitimate debt settlement companies usually charge a percentage of your enrolled debt as a fee, somewhere around 20% of the amount. You’re often limited to enrolling unsecured debt only — so no mortgages or auto loans.

• Debt consolidation

  Don’t confuse debt consolidation services with a debt consolidation loan. When it comes to debt relief, debt consolidation is sometimes used to refer to debt management, though it can sometimes also refer to debt settlement.

• Credit counselling

  Debt relief nonprofits offer credit counselling and services to help you straighten out your finances, like advice on managing your spending, helpful workshops and counsellors that can guide you toward creating a budget or improving your credit score. They also offer debt management programs.

• Bankruptcy services

  No legitimate debt relief company would attempt to steer you toward the bankruptcy process before exploring other options. However, if this is your last resort, they can help you find a bankruptcy lawyer in your area.

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.

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.

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

Bottom line

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.

Frequently asked questions

• Can I use my credit cards after I’ve sought debt relief?

  It depends on the type of debt relief you’re participating in. Talking with a credit counselling agency shouldn’t affect your ability to use existing credit cards, however a debt settlement and management program might require you to cancel your credit cards — or could result in your credit card companies cancelling your cards.

  You might be able to apply for additional cards after you’ve finished your debt relief program, but you won’t be able to use your old ones. Look into secured credit cards designed to help you rebuild your credit score.

• Does the government offer debt relief programs?

  No, but you can find lots of information here.

• Can I get a debt relief grant from the government?

  No, the government do not offer assistance with debt relief.

• What is debt forgiveness?

  Debt forgiveness is one result of negotiation with your creditor — like a credit card company or loan provider. With debt forgiveness, your creditor agrees that you don’t have to pay back a portion, or sometimes all of your debt.

  Debt forgiveness is not without consequence, however. It can come with expensive fees, raise your tax bracket, damage your credit and more.

• Can a debt relief company help me with loans I've defaulted on?

  Possibly. If you’ve recently defaulted on a personal loan, a debt relief company may be able to help you get out of default and begin making on-time payments again. If your loan is in collections, the company may be able to help you negotiate a settlement.