You might notice ads for debt relief services, like debt consolidation, debt settlement, and debt management plans, on the Internet, radio, or television. If you're in dire financial straits, this type of service might sound like the perfect solution to your debt problems.
But, in many cases, the for-profit companies offering these kinds of services are scammers who provide little or no help after you've agreed to pay them. Even if a debt relief company does help you, you'll have to pay a lot for services that you could do yourself or would be better off paying to an attorney or legitimate credit counseling agency.
Debt relief companies typically offer services like debt management plans, debt settlement, and debt consolidation.
Debt relief companies sometimes offer to arrange a plan called a "debt management plan" to pay back your creditors. These plans often include reductions in interest rates or other favorable terms so you can afford repayment.
Here's how a typical debt management plan might work: The debtor deposits money into an account each month. The debt relief company uses the money to make payments to the debtor's various creditors under the plan. In most cases, the debtor has to make regularly scheduled payments into the account for three to five years. The terms of most plans also require the debtor to pay the debt relief company a fee in addition to the monthly deposits.
You should generally avoid for-profit companies offering these plans. However, you might consider arranging a debt management plan with an accredited, nonprofit credit counseling agency (see below).
Some debt relief companies claim they'll work out deals with your unsecured creditors to significantly reduce your debts (supposedly) by 50% or more. To get this kind of reduction, they negotiate lump-sum settlements.
As part of the process, the debtor usually makes regular payments into a designated account rather than to creditors. (Or the company might have you open a savings account in your name and accumulate funds there.) Once the account has sufficient money available, based on the debt settlement company's opinion, the company negotiates lump-sum settlements with your creditors. The company pays the creditors—and often themselves—with money from the account.
Companies sometimes offer to reduce your monthly payments by rolling multiple loans together into one. This process is called "debt consolidation."
Debt relief services are sometimes marketed as "credit counseling services," "debt elimination services," or "debt negotiation services." But no matter what a company calls its particular services, all too often, for-profit debt relief companies:
Many of these scammer companies will advise you to default on your payments while they "negotiate" your debts. In the meantime, your credit scores get worse. Defaulting on your debts will also likely lead to debt collection activities or lawsuits against you.
If a debt relief company makes any of the following claims, it's most likely a scammer.
Some federal laws, like the Federal Trade Commission Telemarketing Sales Rule and often state laws, protect consumers from debt relief scams.
The FTC Telemarketing Sales Rule offers some limited protection against abusive for-profit debt relief companies. Among other things, the Rule:
The Rule only applies to for-profit companies, services related to unsecured debts, and services rendered after the debt relief company calls you or you call in response to an advertisement—not if the company communicates with you through the Internet or the mail. Though, the Rule also usually applies when the customer initiates a call in response to the company's advertisement through the mail or an email.
Almost all states regulate debt relief companies, and some states prohibit debt settlement companies from doing business. These state laws usually don't apply to lawyers and nonprofit organizations.
State laws that regulate debt relief services often:
If you need help negotiating with creditors or debt collectors, consider talking to an accredited, nonprofit credit counseling agency or a reputable attorney rather than hiring a for-profit debt relief service.
Consumer credit counseling agencies are typically nonprofit organizations that offer help in managing unsecured debts. A consumer credit counselor can:
Here are a few ways you might go about finding a legitimate credit counseling agency:
Legitimate credit counseling agencies offer financial help for free or at a minimal charge.
A few common services that debt lawyers offer are:
Many bankruptcy attorneys and debt relief attorneys offer free consultations and will quote you a fee after evaluating your circumstances.