Figuring Out If Debt Relief Is Right for You

Your finances have gotten out of hand. Bills are stacking up faster than money is coming in. Collection calls have become an integral aspect of your life. Even worse, you can see no clear solution you can manage on your own. It’s time to start figuring out if debt relief is right for you.

What Is Debt Relief?

With debt relief, you’ll repay your debts in multiple payments that are significantly less than the actual amount owed. Rather than paying your creditors directly, you’ll make deposits into an FDIC-insured account you control. Once there is a sufficient amount of money in the account, negotiators will work with your lenders to reach settlement agreements in which they will lay your debt to rest in exchange for a payment lower than the debt amount. When an agreement is reached, you are asked to approve it. The funds you deposited will then be disbursed to the creditor as payment. The process will repeat until all of your debts are settled.

How Does It Work?

While terms vary according the company with which you work, the best ones usually require a minimum of $7,500 in debt. Credit card obligations, personal loans and medical bills are usually negotiable. Mortgages, auto loans and federal student loans generally are not. Private student loans can sometimes be negotiated, but this will vary on a case-by-case basis. You’ll be in the program for anywhere from two years to 48 months and you’ll generally see anywhere from a 15 percent to a 35 percent reduction in your obligations. The average fee you’ll encounter will come to approximately 21.5 percent of your outstanding balances.

What’s the Downside?

When you stop paying creditors directly, you will hear from them and it won’t be pleasant. You can tell them you’re working with a debt settlement company to resolve the situation, but there is no guarantee they won’t keep calling. Your debtors will also continue to add fees and interest based upon your balances.

Additionally, Uncle Sam considers forgiven debt a form of income, so you might run into tax consequences. However, if you can demonstrate insolvency (your debts total more than your assets) the taxes can be waived.

Your credit score will also take a bit of a hit, but it may not be as bad as it would be if you filed for bankruptcy protection.

Who Are the Players & What Do They Provide?

Wherever money is involved, there will always be a number business ready to assist you. Each one promises more than the last, and it’s hard to tell which promises are legit and which are just marketing fluff. This is why it’s important to read reviews sites and dive into your own research.

Keep in mind that reviews sites need to be taken with a grain of salt though. An angry poster might comment that Freedom Debt Relief lies, despite their years of quality service.

However, if you’re careful to inquire about the following, you will find a reputable company with which to work.

    • Services Provided: Make sure you are clear about what services they provide, what services they do not offer, and what actions it would take on your part to successfully complete their program with the desired results.
    • Price: Know what fees they charge, when they expect payments, and any other conditions. Companies should not be charging fees before they settle your debt.
    • Timing: You should know how long the program will take to complete, and how long it will take before an offer will be made to a creditor.
    • Settlements: You should know how much you much save, either money or percentage amount, before the company will make an offer on each debt.
  • Negative Consequences: Beware of any company that promises no downsides or will make your debt “go away.” There is no way to make debts disappear without any effort or consequences. All legitimate debt relief has both benefits and drawbacks.

Taking all of the above into consideration will make figuring out if debt relief is right for you easier.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.