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How debt relief companies work

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Debt relief could help you wipe the slate clean — as long as you avoid upfront fees and guarantees.

Debt relief companies are designed to act as a buffer between balance transfer credit cards and filing for bankruptcy. If they sound too good to be true — that’s because they sometimes are. It’s possible to find a standup company, however, if you know what to look for. Just know your state’s regulations before you get started.
Freedom Debt Relief

Freedom Debt Relief

Potentially resolve your debts in as little as two years with monthly payments you can afford.

  • Free consultation
  • No upfront fees
  • Helpful customer service
  • Accredited by the Better Business Bureau with an A- rating

    Compare debt relief companies

    Rates last updated November 13th, 2018
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    Name Product Product Description Costs Requirements
    Freedom Debt Relief is a debt settlement company that works to help people with unmanageable, unsecured debt get back on their feet.
    Monthly payment based on enrolled debt, no upfront fees
    Must have at least $15,000 in unsecured debt and live in a serviced state.
    Get back on your feet with a top-rated debt relief company that works with multiple types of debt.
    18–25% of total enrolled debt
    Must have a legitimate financial hardship which is preventing the ability to pay creditors and a minimum of $7,500 in debt.
    This debt settlement alternative can help you find a path to financial freedom.
    Fees regulated by client's state of residence, can range from
    $0 to $69 with an average monthly fee of $35. No upfront or contingency fees.
    Debt must not be payday loans or secured loans.
    This company claims to significantly reduce your consumer and tax debt.
    20% of enrolled debt or less, no upfront fees.
    Must have verifiable income and more than $10,000 in unsecured debt or tax debt — excluding payday loans.
    This A+ BBB-rated service offers free consultations to lower your monthly payments help you get out of debt faster.
    Charges and fees vary by the company you're ultimately connected with
    Must be at least 18 years old and a legal US resident; additional terms may apply based on services and products used.

    Compare up to 4 providers

    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 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.

    Intended for credit card debt, this is a decent option if you don’t qualify for a debt consolidation loan or balance transfer credit card.

    Debt settlement or negotiation

    Considered a more serious option, 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. 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 counseling

    Debt relief nonprofits offer credit counseling and services to help you straighten your finances by giving you advice on managing your spending, helpful workshops and counselors that can guide you toward creating a budget or getting 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. But they can help you find a bankruptcy lawyer in your area if it’s a viable last resort.

    Is debt relief legal in my state?

    You might have noticed that many debt relief companies don’t offer their services in all states. That’s because most states have some sort of regulation on the books that limit how debt relief companies operate.

    States with regulations typically require debt relief companies to get a license, file a bond with the state or both. They also often have rules restricting what types of services debt relief companies offer and capping fees. Rules change frequently, so it’s a good idea to reach out to debt relief companies to make sure they’re currently operating in your state before signing up.

    After the FTC regulations in 2010, some debt relief companies restructured themselves as law firms, which don’t have to comply with state or federal rules. There are some legit law firms out there, but it’s a good idea to check for common red flags — like charging fees before settling debt — before working with one.

    Current debt relief regulations


    • Arkansas
    • Hawaii
    • Kansas
    • Louisiana (unless it’s nonprofit)
    • Massachusetts
    • New Mexico
    • North Carolina
    • Wyoming


    • Arizona
    • California
    • Colorado
    • Connecticut
    • Delaware
    • Florida
    • Georgia
    • Guam
    • Idaho
    • Illinois
    • Indiana
    • Iowa
    • Kentucky
    • Maine
    • Maryland
    • Michigan
    • Minnesota
    • Mississippi
    • Missouri
    • Montana
    • Nebraska
    • Nevada
    • New Hampshire
    • New Jersey
    • New York
    • North Dakota
    • Ohio
    • Oregon
    • Pennsylvania
    • Rhode Island
    • South Carolina
    • South Dakota
    • Tennessee
    • Texas
    • Utah
    • Vermont
    • Virginia
    • Washington
    • West Virginia
    • Wisconsin

    No regulation:

    • Alabama
    • Alaska
    • Oklahoma
    • Puerto Rico
    • Virgin Islands
    • Washington DC

    Debt relief regulations state map

    Top 5 debt relief companies

    CompanyServicesTypical costsTypical savingsCustomer reviewsState availability
    National Debt ReliefDebt settlement18% to 25% of enrolled debtVariesBBB: A+
    Trustpilot: 9.4/10
    Not available in CT, GA, KS, ME, SC, OR, VT, WV or NH
    Freedom Debt ReliefDebt settlement20% to 25% of enrolled debt15% to 35% of enrolled debt after feesBBB: A+
    Trustpilot: 9/10
    Not available in CT, GA, HI, IL, KA, ME, MI, ND, NH, NJ, OH, OR, RI, SC, VT, WA, WI, WV or WY
    CuraDebtDebt settlement, tax settlementAround 20% of enrolled debt80% to 30% of enrolled debt after feesTrustpilot 7.7/10Not available in CO, CT, GA, ID, IL, KS, ND, NH, SC, VT, WA, WI, WV, Puerto Rico or the Virgin Islands
    Accredited Debt ReliefBankruptcy, debt consolidation, debt management, debt settlementDepends on your debt relief, but debt settlement fees typically range from 18% to 25%Depends on your debt relief, but debt settlement clients typically save 25% to 32% of enrolled debt after feesBBB: A+
    Trustpilot: 9.4/10
    Not available in CO, CT, DE, GA, HI, IL, KS, ME, NH, ND, OR, RI, SC, VT, WA or WI
    New Era Debt SolutionsDebt settlement16% to 20% of enrolled debt.43% to 47% of enrolled debt after fees.BBB: A+Not available in PA.

    When 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 counseling organization, the services offered by debt relief companies can be risky. There’s no guarantee that your creditors will agree to lower rates or payments. And If you stop making payments to your creditors — as many debt settlement companies recommend — you could get sued for payment during lengthy negotiations.

    But 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 not ready for bankruptcy. You’ve done the math and know you won’t be able to pay off your debt in the next five years — but you either don’t qualify for some types of bankruptcy or are worried about losing your assets.

    Consider other options if…

    • You’re struggling with federal student loans. You can’t use a debt relief company to negotiate your student loan rates set by the government. Fortunately, there are 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 counseling 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 10 years. While the negative impact of a bankruptcy diminishes over time, your credit cards could be canceled, 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 a lawsuit if your creditors don’t want to wait through negotiation. And there’s 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.

    Take caution with either option and understand the lasting impacts on your credit to make an informed decision.

    Debt settlement vs bankruptcy: Which is better for you?

    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 a 2010 federal crackdown cleaned up the industry in part, scammers are always creating new ways to take your money.

    It’s possible to avoid a scam by doing some poking around. When researching a debt relief company, ask yourself:

    • Is it accredited? Many legit debt relief company are accredited with the American Fair Credit Council or the International Association of Professional Debt Arbitrators, which set and maintain industry standards.
    • How long has it been around? While not always the case, older more established businesses feel less pressure to engage in unsavory 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? It’s illegal for debt relief services to charge you a fee before they’ve provided results. Most legit companies also won’t ask for fees all at once, preferring steady payments toward settlement accounts and services.
    • How much control will you have? Debt settlement companies work by having you pay into an account from which the company then pays your debt settlement fee. By law, you control these funds and can even withdraw from them without a penalty.
    • 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 student loans and even some unsecured debt, but most only handle such basics as medical 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 a lawsuit.
    • 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 a see a company committing any of these offenses that are illegal for any debt relief company:

    1. It charges upfront fees for its services
    2. It guarantees a specific amount of debt savings
    3. It promises it can settle lawsuits and stop calls from collection agencies
    4. It advertises itself as a new government program that can erase your debt

    Student loan debt relief scams

    Student loans quickly add up, and often, it’s tempting to look for a quick fix to high monthly payments. While there are programs out there that can help alleviate some of the pain, you can’t trust everything you find — scammers are out there trying to prey on you when you’re down.

    The most common scams that predators run claim to be able to lower or eliminate your debt. Often, you’ll be asked to pay a fee of hundreds or thousands of dollars to consolidate your debt or apply for a new program before your application is processed. Watch out for any offers to get you in on a new program, customer service reps that want you to give out your login information and claims to be representatives from the Department of Education. All of these are methods to talk you out of your money.

    Getting sued for debt relief

    Some 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. And if you lose the lawsuit but can’t pay up … well, you can land in jail.

    How likely is this scenario? Not very, but it is a possibility. 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?

    Debt relief companies can only do so much. You have to make their programs work for you.

    5 ways you can make debt relief worth it

    1. 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.
    2. Watch your credit score and report. Know what to expect, and monitor your credit 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 counseling. Other types of debt relief shouldn’t affect your credit score or report at all.
    3. 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, and to keep harassing calls from collection agencies or potential lawsuits at bay.
    4. 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. If the numbers don’t add up, you may need to reevaulate your company and find a different solution.
    5. Take advantage of free resources. Credit counseling agencies and other debt relief companies often provide tools to help you stick to a budget or rebuild your credit score. Use them to more quickly get back on track.

    2 things you might be (unpleasantly) surprised to know about debt settlement

    • Fees aren’t based only on your initial debt. If settling $10,000 in debt requires a fee of 25%, that doesn’t necessarily mean you’ll pay $2,500. Tricky to calculate, fees depend on how quickly your debts are settled, how your interest accumulates, whether you continue paying your minimums, late fees your creditor charges and more. Expect that by the time it’s settled, your debt will be well over the amount you began with.
    • Debt settlement counts as income. That’s right: Any settled debt of more than $600 is considered taxable income. After taxes, you could end up saving only 10% — or less. There is a 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.

    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 soonest. You could end up saving a lot of money — especially on shorter-term loans that build up fast if you don’t pay them off.
    • 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. But it could cost more than the avalanche method in the long run.
    • Negotiate with your creditors. Your debt company might tell you it’s best to leave negotiations to the professionals. But it is possible for you to negotiate with your creditors yourself. If you’re 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.

    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 debt relief in their names deal mainly with debt settlement. Credit counseling agencies, on the other hand, tend to specifically advertise their counseling services.

    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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