Debt relief companies, also known as debt settlement companies, are for-profit businesses that help people overwhelmed with debt. They negotiate with your creditors or lenders on your behalf so that your creditors can accept less than the total amount you are owing. They do this for an agreed fee.
Being riddled with debt can be tiring and embarrassing. Whether you have credit card debt, personal loan, IRS debt, medical bills, or other types of unsecured debts, various debt relief companies can help get your finances back on track.
Usually, a debt relief company will ask you to pay a certain amount of money every month into a savings account they set up for you to build up a lump sum of money used to pay your creditor. After you have reached a particular amount of money, the debt relief company then reaches out to your creditor to convince them to accept the amount you have saved even though it is less than the amount owed to them.
Debt management plans, credit counseling, and debt settlement also fall under the debt relief umbrella. Although they are approached differently, the end goal is to help people find pathways out of debt.
When Should You Consider Debt Relief?
Asides from debt settlement, there are several approaches to debt relief. This includes debt, credit counseling, debt management plans, and bankruptcy. Debt settlement should, however, be considered when either of the following is true.
- You do not have a hope of repaying your unsecured debt (including credit card debt, medical bills, personal loans) within five years, even if you go by stringent measures to cut spending.
- Your debt equals half or more of your gross income The total of your unpaid unsecured
A debt relief program may not work for you if you continue to add to your debt balance or you are not interested in making a long-term commitment to repaying your debt. Debt relief programs work using one or a combination of the following approaches:
- Interest rate reductions
- Reduction in the principal amount owed
- Changes to loan repayment terms
- Loan refinancing
- Consolidating debt
Bankruptcy is also said to be a form of debt relief. But this can come with a significant impact on you as an individual. We usually consider this a last resort as it will do severe damage to your credit score over several years. And just like debt settlement agreements and debt management plans, filing bankruptcy typically won’t help you get over a mortgage, auto, or student loan.
Selecting a Right Debt Relief Company
The services of different debt relief companies are tailored to different financial situations and the level of risk a client will take. So any debt relief company you choose must meet your specific needs. Figuring a debt relief company should not be difficult, as Sfgate.com has a list of the top companies you can consider. However, it would help if you remember the debt relief company you choose should have an excellent reputation, transparent process, and reasonable service fee. These are factors you should consider when choosing which debt relief company to use.
Size of your debt
The top debt relief companies mostly require you to have a minimum debt of $10,000 to qualify for their debt relief service. But some companies can attend to lower amounts of debts.
Type of debt
Some debt relief companies only specialize in some types of debts. It is vital to look for a debt relief company that can handle your specific type of debt.
Better Business Bureau (BBB) Rating
You can gain significant insight into a debt relief company’s reliability from its BBB rating. It is expected of most businesses to receive customer complaints from time to time. It becomes a problem when these complaints reveal a pattern. It is thus essential to consider a debt relief company with minimal customer complaints.
It is imperative to only go for a debt relief company that is as transparent about the entire process as possible. This is because the debt settlement industry can be notorious for scams, and you don’t want to complicate an already difficult situation. Before you sign up, you should know precisely what you need to qualify, which creditors to be paid, how much, who would pay, how long the process will last, and any risk involved. Indeed, a debt relief company cannot succeed in all debt situations, but a good debt settlement company will make it clear when your chances are low.
Companies that conduct business over the phone, including debt relief companies, may not charge upfront fees as there are no guarantees regarding debt relief. Because of this, no debt relief company should charge an upfront fee. You should see it as a red flag when a debt relief company requests an upfront fee before serving you.
What Can a Debt Relief Company Help With?
A debt relief company can help with any of the following:
When you fail to pay back a personal loan from a lender, they typically start charging late fees, which can accumulate and become problematic over a short period. This will also affect your credit score badly, and the lender can attempt to sue after 90 days.
Credit Card Debts
Credit card companies charge interest on your debt when you don’t meet up with your repayment plan. This can increase so quickly and become an issue.
Going through a complicated medical condition is problematic enough, and being unable to settle your bills in time can be disturbing. Medical bills that are unpaid within a specified period will go to collections and become a significant debt burden.
Unsecured debts refer to those debts that do not require collateral. This includes all the other three listed above and more. If the borrower defaults on this type of debt, the lender must initiate a lawsuit to collect what is owed. To prevent such legal tussle, a debt relief company can be helpful.
With debt settlement, you may have to be several months behind in repayment to negotiate a payoff agreement, and this can hurt your credit score for a while. But you have to sacrifice something! Debt relief may give you the new start or the breathing room you need to make real progress finally.