Many consumers with overwhelming debt want to get free or low-cost help to negotiate with creditors. Negotiating with your creditors can be a good start to financial recovery because you might be able to reduce the overall amount that you owe, increase the time period over which you can repay the debt, or lower your interest rates. But getting free or low-cost assistance can be tricky. It's often difficult to know where to start and there are plenty of scammers out there who will offer to "help" you.
Below you can learn where to get free or low-cost help in dealing with your creditors, such as from a legal aid clinic or a reputable consumer credit counseling organization, as well as how to avoid debt settlement scams.
Legal Aid Programs and Clinics
Legal aid programs and clinics, which are often staffed by pro bono (volunteer) attorneys, provide legal assistance to low-income individuals and families.
How Do Legal Aid Clinics Provide Assistance?
To help people understand their rights and responsibilities, legal aid programs typically provide:
- attorney representation in certain individual cases
- do-it-yourself advice on a variety of issues (such as how to negotiate with creditors or help in working out a debt repayment plan), and
- self-help materials (delivered in workshops, over telephone help lines, in online chats, etc.)
Legal aid offices and legal clinics often offer their services for free if you meet certain criteria. (You can find a list of various legal aid programs on the Legal Service Corporation's website.)
Consumer Credit Counseling Agencies
Consumer credit counseling agencies (not to be confused with debt settlement companies) are often non-profit organizations that offer help in managing your unsecured debts, such as credit card and medical bills. A consumer credit counselor can:
- review your current financial situation
- help you develop a budget to manage your finances, and
- in some cases, develop a personalized plan (called a debt management plan) to deal with your debts.
Debt Management Plans
A debt management plan is a way to pay down outstanding debt by making a single monthly payment to the credit counseling agency, which it will then distribute to your creditors.
In most cases, the credit counselor will not actually negotiate any reduction in the amounts you owe, but will lower the overall monthly amount you pay by getting the creditors to:
- increase the time period over which you can repay the debt
- waive fees, and/or
- reduce your interest rates.
The credit counselor will also try to get the creditors to agree not to pursue collection efforts or charge late fees or penalties so long as you are in the debt management program. (Learn more about debt management plans.)
Cost of Consumer Credit Counseling Services and Debt Management Plans
Even though many consumer credit counseling services are non-profit, these companies typically charge fees for their services, which they sometimes deduct from the payments you make to them. The cost of services varies from agency to agency and according to state law, but some organizations provide counseling at no or low cost.
Avoiding Certain Credit Counseling Agencies
While many credit counseling agencies are dedicated to helping consumers resolve their money troubles, there are some that charge excessive fees, give bad advice, or do not perform the services they promise. To find a legitimate consumer credit counseling organization, shop around and look for one that offers in-person counseling.
If the consumer credit counseling organization that you are considering using does any of the following things, this should serve as a warning for you to find another agency:
- It pushes a debt management plan as your only option before taking the time to fully analyze your financial situation. (While debt management plans work well for some people, they are not appropriate for everyone.)
- It charges you for educational materials.
- It requires you to give details about your situation before it will tell you about the company and the services it provides.
- It refuses to help you if you can’t afford to pay for their services.
(Learn more in Nolo’s article Choosing a Credit Counseling Agency.)
Debt Settlement Scams
Debt settlement companies claim that they will convince your creditors to settle your credit card or other unsecured debts in full by offering lump sum payments that are less than the total amounts you owe.
How Debt Settlement Companies Work
You won’t get free or low-cost help from a debt settlement company. Debt settlement firms (unlike some consumer credit counseling agencies) are for-profit companies.
These companies will tell you to stop making payments to your creditors, and instead make the payments to them while the debts are being negotiated. The monthly payments cover:
- the hefty fee for the debt negotiation services, and
- your savings, which are set aside for future settlements of your debts (as negotiated by the debt settlement company).
The debt settlement company may also charge a contingency fee, which is a percentage based on the amount saved through settlement.
Beware of Upfront Fees
Even though the federal Telemarketing Sales Rule prohibits debt settlement companies from charging upfront fees before actually reducing or eliminating your debt, they often do so anyway. (Learn more about the Telemarketing Sales Rule in Nolo’s article Regulation of Debt Relief Services.)
Your Debt Could Actually Increase As a Result of Debt Settlement
During the time it takes for the debt settlement company to work with your creditors, you could get hit with late fees and penalty interest charges. Even if the debt settlement company manages to settle one or more of your debts, you might end up with more debt than you started with. In almost all cases, you’re better off using the money you would have paid to the debt settlement company to make payments to your creditors.
In addition, creditors and debt collectors often refuse to negotiate with debt settlement companies. They may even step up their efforts to collect from you by filing a lawsuit, for example.
Ultimately, debt settlement companies usually aren’t able to obtain better terms than if you simply approach the creditors on your own. (Learn more about the risks and pitfalls of using a debt settlement company in Nolo’s Debt Settlement Company Scams article.)
The Bottom Line
Working with a free legal aid program (if you qualify) or a reputable low-cost consumer credit counseling organization are two practical options for dealing with your debt, while debt settlement companies are best avoided. Keep in mind that you can also negotiate directly with your creditors on your own for free. (To learn more about how to negotiate with your creditors, including negotiation strategies, visit Nolo’s Debt Settlement & Negotiating With Creditors area.)