• You may be out of debt sooner.
• You may avoid bankruptcy.

Cons

• Your credit score may be negatively affected.
• Your success is not assured.
• You may not keep to the plan.
• You may owe additional taxes.

Alternatives to Debt Relief Programs

As you pursue debt relief solutions, examine other programs and tactics that may be more suited to your goals.

• Nonprofit credit counseling services: Credit counselors can assess your financial condition, build a budget, and develop a specific debt repayment plan. Many of these services charge low or no fees at all.14The National Foundation for Credit Counseling (NFCC) is an excellent location to begin learning about solutions for persons battling with consumer debt.
• Debt management plan: Credit counselors collaborate with creditors to construct a debt management plan that results in lower monthly payments. If authorized, you will make a single monthly payment to the credit counseling service until your debts are paid off. You will have to stop using credit cards, but your accounts will stay in good standing. These plans normally include a charge.
• Debt consolidation: Debt consolidation entails consolidating many debts into one through personal loans or credit card balance transfers. If your consolidation loan or balance transfer credit card has a lower interest rate than your other debts, this might make it easier to settle unsecured obligations such as credit card bills or medical costs, as well as save you money over time.Debt consolidation can benefit your credit score by allowing you to make timely payments with lower interest rates to your credit card company or lender.

Debt Relief vs. Bankruptcy

Debt relief differs significantly from Chapter 7 or Chapter 13 bankruptcy. Declaring bankruptcy involves a debtor who is unable to repay their debts petitioning the court for temporary protection from creditors for their unsecured debts, with the goal of resulting in an equitable settlement of the debtor’s obligations, typically for significantly less than the original amount owed.

Secured debts, such as mortgages or vehicle loans, are not dischargeable in bankruptcy, but instead require the borrower to forfeit the loan collateral if they are unable to make payments. Debt relief is a procedure in which a third party renegotiated the terms of existing loans for a fee in order to minimize the expense of carrying debt, either through lowered interest or the cancellation of a portion of the principal.

While debt relief can have a negative influence on credit, bankruptcy drastically lowers both credit scores and can prevent access to more credit for an extended period of time because it is recorded to credit bureaus for seven years.

Debt Settlement vs. Debt Consolidation

Debt settlement is frequently mistaken with debt consolidation, but the two phrases are vastly different. Debt settlement is the negotiation between the borrower and the lender(s), either directly or through an agent working on the borrower’s behalf, to induce the lender to accept something less than the total amount owed by the borrower. Debt consolidation is a loan granted by a new lender to pay off existing consumer debts, resulting in a single, lower-interest payment that the borrower must repay.

Who Should Consider Debt Relief?

Consider debt relief if:

• Have more debt payments than you can service (i.e., make the minimum payments)
• Are you prepared to have your credit score considerably reduced by the debt settlement process?
• Do not want to consider declaring bankruptcy.

Debt settlement services can be expensive and have a bad impact on your credit, so it is not recommended that you pursue them without first contacting your creditors to see if there are any other options for debt restructuring or more favorable repayment plan terms available.

Is Debt Relief Right For You?

The decision to seek debt relief is very personal and should not be taken carelessly. That’s because it can have a long-term impact on your credit score and may not totally relieve you of the duty to repay all of the principle, interest, and fees owed on your obligations.

While debt relief might provide an initial settlement with creditors, these lenders frequently charge off the percentage of the debt that is not collected to debt collection agencies. However, debt settlement can provide many people with a road out of debt that they would not have had without the ability of a debt relief organization to negotiate with creditors on their behalf.

How to Choose a Debt Relief Company

Before using a debt relief organization, ensure that you understand the costs and interest rates, the services provided, and the firm’s reputation.

• Debt settlement often costs 15% to 25% of the debt outstanding.
• Look for respectable and trustworthy companies that have been accredited by the American Fair Credit Council (AFCC) or the International Association of Professional Debt Arbitrators.
• It’s also a good idea to check with your state attorney general’s office to see if there have been any recent or outstanding complaints against any of the companies you’re considering.

Any company you examine should be open about its pricing and processes, have high customer satisfaction ratings, and be free of regulatory action.

How to Apply for Debt Relief

To apply to a debt settlement program, you must:

1. Research companies that can settle your type of debt.

• Not all debt reduction companies can handle particular forms of debt, such as payday loans, school loans, or medical debt. However, most can handle common types of consumer debt, such as high-interest credit card debt.
• Compare fees imposed by different companies; most charge a certain percentage of the outstanding debt being settled.

2. Make sure you meet any debt-level requirements.

• Some companies want a particular amount of debt before they can work with you.

3. Contact the company that best suits your needs.

• Provide creditor information, including lender names, account numbers, loan payment amounts, total loan amounts outstanding, and the interest rates charged.
• Please include personal information such as evidence of employment (pay stub, 1099, or W2), social security number, and annual income.
• Sign a contract allowing the company to negotiate with your creditors and agree on a price for the services performed by the company.

Before settling on a debt settlement organization, thoroughly study your options, both online and by chatting with friends and family, to ensure that the one you choose has a strong reputation, is not sanctioned by any regulatory agencies, and has positive user experience evaluations. Before hiring a company to help you settle your debt, you should assess its reputation, integrity, and openness.

Risks of Dealing With a Debt Relief Company

Choosing to deal with a debt reduction organization to settle your debt carries dangers. If you opt to proceed with debt relief, you may face the following:

• Lenders who refuse to settle your debts.
• A big reduction in your credit score.
• Adverse information on your credit record for up to 7 years.
• Unpaid debt, however satisfied with the original lender, may be sold to debt collectors.
• High fees—some debt relief organizations charge up to 25% of the total amount resolved, however this varies by state.
• Any debts over $600 paid or forgiven may be subject to federal income tax.

How to Spot a Debt Relief Scam

To prevent being cheated by an unscrupulous debt relief organization, be aware of the following red flags:

• Demand payment upfront, before it settles your debt.
• A guarantee that they will settle all of your debt and make you debt-free.
• An exceptionally large amount of consumer complaints.
• No Trustpilot rating or a very low rating
• A record of the punishments and penalties imposed by government regulatory agencies.
• An unsecure online application page lacking the HTTPS security protocol.

What Debt Relief Company Is Best to Work With?

National Debt Relief is Investopedia’s top pick for the finest overall debt relief firm in the country in February 2024. We rated the top debt firms based on 19 distinct factors in four categories: reputation and stability, customer experience, services, and expenses and fees. National Debt Relief received the highest overall grade when compared to the other firms we investigated.