Editor's choice: Freedom Debt Relief
- Flexible payments
- Leader in debt negotiation
- No upfront fees
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Debt relief isn’t the right choice for everyone. You might want to consider signing up for debt relief if you answer “yes” to the following questions:
Before you sign up with a debt relief company
Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And they aren’t always transparent about these costs or drawbacks that can negatively affect your credit score. You might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a debt relief company:
Most debt relief companies offer a combination of services designed to set you on a debt-free path — and keep you there.
|Service||Best for when you…|
|Credit counseling||Need help making a plan to get out of debt on your own and building healthy financial habits.|
|Debt consolidation||Have strong credit and want more favorable rates and terms, or more manageable repayments.|
|Debt management||Can’t qualify for debt consolidation on high-interest credit cards or unsecured debt.|
|Debt settlement or negotiation||Can’t afford repayments on a debt management plan and aren’t eligible for bankruptcy.|
|Bankruptcy services||Want to find representation for bankruptcy proceedings.|
Credit counseling is a service offered by nonprofit agencies. These services include workshops, courses and one-on-one sessions to help you come up with a budget, manage spending and improve your credit score. You can find a credit counseling agency near you on the Department of Justice’s website.
Debt consolidation involves taking out a loan or balance transfer credit card to pay off your current balances and move them into one. It’s a way to lower your rates, reduce monthly payments and have just one monthly repayment to worry about. You can find a debt consolidation loan through a personal loan provider.
With a debt management plan, a credit counseling agency negotiates with your creditors to lower your interest rates or monthly payments. You agree to begin paying off your debts through the agency with an affordable monthly payment — usually over three to five years — while the agency continues to pay your creditors on your behalf.
Debt settlement or negotiation companies connect you with a specialist who negotiates 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 three to five years.
Legitimate debt settlement companies charge a percentage of your enrolled debt as a fee, typically 20% of the amount.
No legitimate debt relief company would attempt to steer you toward the bankruptcy process before exploring other options. But they can help you find a bankruptcy lawyer in your area if it’s a viable last resort.
Debt relief isn’t a sure thing and each service serves a different purpose.
You’ve probably heard that bankruptcy should be used as a last resort because it stays on your credit report for up to 10 years. But debt settlement and other debt relief options might also damage your credit score. And there’s no guarantee they will work, making them an even riskier move.
Understand how bankruptcy and debt relief can impact your life before making a decision.
Unless you’re just looking to sign up for a few budgeting workshops, the services offered by debt relief companies can land you in a worse situation than you started. Potential risks to consider depend on what type of debt relief option you sign up for.
While debt settlement can be helpful for a lot of people, know what you’ll have to pay before you get started.
There is a tax loophole, however: You might be exempt if your tax liabilities are greater than your assets at the time of the settlement. Talk with a tax specialist before enrolling in a debt settlement program to learn how this exemption might affect you.
Some debt relief companies are scams, but not all of them. The federal government has made an effort to crack down on scammers since 2010. It’s easier to find a legit credit counseling agency than any other type of debt relief company — they’re mostly nonprofit and the Department of Justice has already done most of the work for you by compiling a government-approved list.
It should set off alarm bells if you a see a company committing any of these offenses that are illegal for any debt relief company:
The most recent government crackdown has focused on student loan debt relief scams — one reason why most legit debt relief companies won’t touch student loans.
One key sign of a student debt relief scam is when companies charge upfront fees before processing your application. Many also reach out to you and use pressuring sales tactics to get you to sign up.
Watch out for any offers that try to get you to sign up for a new program fast, customer service reps that ask for your login information and anyone who claims to be a representative from the Department of Education. And check out our guide to avoiding student loan debt relief scams to find even more tips on what to look out for.
Most states require debt relief companies to get a license, file a bond with the state or both. Many also have rules restricting what types of services debt relief companies can offer and capping fees. Because of this, some debt relief companies may not be available in your state.
The states a company operates in can change along with the laws — reach out to make sure it’s currently operating in your state before signing up.
Consider the following factors when comparing debt relief companies:
Handling past-due medical bills isn’t quite the same as unsecured loans or credit card debt. While it works a lot like unsecured debt, there are additional steps you can take like negotiating with your provider, signing up for a hardship plan and reaching out for help from a nonprofit. Consider these options before taking more dramatic steps like debt settlement or bankruptcy.
Think debt relief might be right for you? Follow these steps to get started:
Now it’s up to you to complete your program. Keep an eye on your balances and stay in touch with your point of contact. Be sure to reach out if you have any questions or are unsure about how something works.
It takes self control and persistence to successfully complete a debt relief program. Here are a few tips that may be able to help:
You don’t necessarily need to sign up for debt relief services to get out of debt. You can also do it on your own by paying off your debt strategically or negotiating down your balance.
There are two popular methods to strategically pay off your debt on your own: the avalanche and snowball methods.
If you have the stomach for difficult conversations, you might want to take up negotiating your debt on your own. To do this, call up the people you owe money to, tell them you can’t pay your balance in the time you have and then ask for better repayment terms or even a reduction on what you owe.
If you’re unable to renegotiate your debt, you may have to declare bankruptcy. If you’re going to do this, hire a lawyer to help you out with the process. And know that your credit and ability to borrow will be affected for many years.
Debt relief encompasses a wide scope of services, from debt negotiations with your creditors to debt management tools. Avoid signing up with a company that doesn’t meet federal requirements or otherwise rubs you the wrong way. And make sure you’ve exhausted other options like debt consolidation loans before taking any risky steps.
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