Are Debt Relief Programs Legit?

There are plenty of good debt-relief programs out there. There are also plenty of bad ones.

If consumers do their homework and stick to their programs, there is indeed relief to be found. If they don’t, they are essentially scamming themselves.

What Are Debt Relief Programs?

Debt relief companies have plans that can get you out of debt. The key word is “can.”

Whether it works depends on the plan and your commitment to it.

There are two primary approaches – debt settlement and debt management. Both start with credit counselors, who do an analysis of your financial situation.

Debt settlement companies then negotiate with creditors to reduce the amount you owe. The goal is to arrive at an amount that you pay in one lump sum. Creditors are not obligated to negotiate with you and the fact you don’t pay the full amount can heavily damage your credit score.

With a debt management program (DMP), nonprofit credit counselors have an agreement with creditors that allows them to spread your debt repayment plan over 3-5 years at a reduced interest rate. You pay a small monthly fee to the agency, and they gradually pay off your debt. Your credit score will improve along the way.

There are other debt-relief plans that have more of a Do-It-Yourself (DIY) feel. Whichever route you take, don’t rush into it. Debt relief is ripe for scamming, as plenty of consumers have learned the hard way.

So, Are Debt Relief Programs Legit?

Consumers have been ripped off, but that doesn’t mean every company is crooked. Far from it. Plenty of debt relief companies operate legally, ethically and turn out satisfied customers.

The best way to find one is to check its accreditation with the Better Business Bureau. Also, check for actions taken against the company by your state attorney’s office.

The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) are in charge of overseeing debt relief companies. Look for consumer reviews and complaints filed with the FTC or CFPB.

The industry also polices itself. Legitimate companies like InCharge Debt Solutions are members of the National Foundation for Credit Counseling and the Financial Counseling Association of America.

If you’re thinking about hiring a debt relief company that isn’t a member of those organizations, you might want to reconsider.

Warning Signs of a Debt Relief Scam

If it sounds too good to be true, it probably is. When it comes to debt relief companies, just tweak that to say, “If it sounds too good to be true, hang up the phone.”

The mere fact that a debt relief company gave you an unsolicited call would be a warning sign. Legit companies only contact people who’ve first contacted them.

They also don’t promise to eliminate all debt, demand up-front payments, or use high-pressure sales tactics. Unfortunately, a lot of people don’t notice these red flags.

One particularly sad case involved the “Accelerated Debt” program run by seven companies. They claimed to represent consumers’ banks or credit card issuers and promised to reduce debts by 75%.

They made $100 million before the FTC got wind of the scam and took them to court. The saddest part was that the scammers primarily targeted the elderly and veterans.

One unidentified victim – a disabled veteran – had to use his retirement fund to repay the debts he incurred, starting with the $10,000 advance fee he paid the shameless scammers.

How to Vet a Debt Relief Program

If you’re in the market for a debt relief company, you already have enough anxiety. You shouldn’t have to worry about the company itself.

The best way to avoid that is to do some homework, know your rights and ask questions.

Step 1: Research the Company (Better Business Bureau, Trustpilot)

Your state attorney general’s office should have complaint records filed against debt relief companies. Check to see if a company you are considering is on the list.

Don’t stop there. The Better Business Bureau rates companies based on factors like ethical practices, performance and how it handles consumer complaints. Go to the BBB website and see what grade your prospective company has.

For instance, InCharge Debt Solutions has an A+ rating. Hard to beat that. If a company has anything worse than a B, flunk it out of your consideration.

Reviews, like those available on Trustpilot.com, are another source to see what consumers have to say about a debt relief company.

Step 2: Verify Licensing and Accreditation

Just because a debt relief company says it is licensed and accredited does not mean it is. To confirm the company has the proper license, contact your state’s banking regulator or check the websites of specific licensing boards in your state.

If you’re dealing with the company in person, ask to see the license. State laws often require companies to display their licenses at their physical locations.

As for accreditation, check with the BBB or the two main bodies that accredit debt relief companies – the NFCC (nfcc.org) and the FCAA (fcaa.org).

Step 3: Ask for a Written Contract

Companies may pass Steps 1 and 2, but you still want to make sure they’ll back up what they say. The best way to do that is to get it in writing.

Draw up a contract that details what services you are signing up for. Reputable companies will have such documents as a standard business practice. Though, as with most contracts, that can raise another issue.

Step 4: Understand Fees and Services

The program’s expectations, risks and requirements should be explained in the contract. But contract language can get arcane if you’re not a contract attorney.

Make sure you understand the entire process, starting with what the program will cost and what services the company will deliver. We’re talking about your financial security here. Before entrusting it to a debt relief company, make sure you know what you’re signing up for.

Step 5: Know Your Rights Under the Telemarketing Sales Rule (TSR)

The FTC established the Telemarketing Sales Rule (TSR) to protect consumers from deceptive and abusive telemarketing practices. Legitimate debt relief companies won’t robocall you in the first place.

That said, the TSR has more protections you should be aware of. They include a ban on advance fees, prohibition of misleading claims, disclosure, and record-keeping requirements. If your debt relief company violates the TSR, don’t hesitate to notify the FTC or your state attorney.

Pros and Cons of Debt Relief Programs

You’ve vetted your debt relief company. You’ve studied the strategies. Now it’s time to weigh the advantages vs. the disadvantages of signing up.

Pros:

• Potential to reduce total debt. Programs like a debt management plan (DMP) are designed to reduce interest rates and ease repayment terms. A debt settlement plan can significantly reduce what you owe, but there are definite downsides.
• Avoid bankruptcy. Talk about a downside, filing for bankruptcy will ruin your credit score and stay on your credit report for seven years. Use it as a last resort only.
• Structured repayment plan. A DMP will simplify your life. Instead of having to pay a variety of bills, your debts are consolidated, and you must make only one monthly payment.
• Credit counseling. Solving any problem is easier with expert advice. Debt relief companies have certified counselors who will analyze your financial situation and offer solutions to get you out of debt. Not only that, but going through a DMP might instill the financial discipline that will keep you out of debt.

Cons:

• Negative impact on credit score if you go the debt settlement route. With debt settlement, you stop paying creditors as the debt relief company tries to negotiate a deal. Those delinquent payments can take up to 100 points off your credit score, and there’s no guarantee your creditors will accept your low-ball offers.
• Fees involved. Debt settlement companies typically charge 15%-25% of either the total debt enrolled or the amount of debt that gets settled. With a DMP, there’s usually a setup fee and a monthly maintenance fee averaging between $25 and $75. Basically, you have to spend money to save money.
• Potential creditor lawsuits. At any point in the debt relief negotiating process, there’s nothing to keep creditors from filing suit against you to recover unpaid bills. It’s unlikely, but it’s not unheard of.
• Credit card withdrawal. With a DMP, you are expected to stop using credit cards and live within your means. Life without a credit card can require a major mental adjustment.

Types of Debt Relief Programs

Getting relief from debt is like being sick and going to the pharmacy. There are a variety of medicines to choose from. Some are harder to swallow than others. You must choose which one is the best remedy for you.

Debt Management

Instead of paying a stack of bills that have differing interest rates and deadlines, the debt relief company works with creditors to lower interest rates and consolidates your debts. You make one monthly payment to the company, which is lower than what you were paying with all those individual bills.

The company distributes that money to your creditors in agreed-upon amounts each month. A debt management plan typically takes between 3-5 years to complete.

Debt Settlement

The debt relief company negotiates with your creditors to reduce what you owe and pay it in one lump sum. Creditors must be convinced you are unable or unwilling to pay what you originally owed. Debt settlement may sound good, but there are serious credit score implications and the cost for the service may be as much as what you thought you were saving.

Bankruptcy

Bankruptcy is not a “Get Out of Debt Free” card. Chapter 7 bankruptcy may allow you to keep life’s necessities – home, car, clothing, work-related equipment – but anything of value gets sold to pay your debts. And Chapter 7 stays on your credit report for 10 years. Chapter 13 requires a court-approved repayment plan that takes 3-5 years. It stays on your credit report for seven years. Either form of bankruptcy will wreak havoc on your credit score.

Hardship Programs Directly with Creditors

Many credit card companies have hardship programs that reduce interest rates, monthly payments and waive late fees. But you must prove you’re financially strapped and otherwise might not be able to pay your bill.

Alternatives to Debt Relief Programs

Just as there is more than one way to skin a cat, there is more than one way to get a cat out of debt. If you aren’t interested in formal debt-relief programs, consider some of these options.

Debt Consolidation Loans

You can take out one large loan to pay off your credit cards and other unsecured debts. Ideally, the interest rate on the loan will be less than what you were paying collectively.

The pros are one monthly payment and lower interest payments. The cons are pricey loan fees and the fact that a loan is legally binding.

A debt consolidation loan is a Do It Yourself remedy. A DMP or debt settlement administered by a debt relief company can be canceled at any time.

DIY Options

There is truly a Do-It-Yourself approach that requires a lot of discipline but can be successful. You make a budget, list your debts, and pay them off one at a time. The two main payoff methods are the snowball and the avalanche.

With the snowball, you pay the smallest debt first, while paying only the minimum on other debts. When you pay off the smallest debt, move on to the next smallest and keep working your way up. This supposedly builds motivation and momentum.

With the avalanche, you pay the highest-interest debts first, while again paying the minimum on other debts and working your way down. This saves a lot on interest and that can be motivating enough.

Credit Counseling

A certified counselor will take a fine-toothed comb to your financial situation, reviewing your income, expenses, and spending habits. He or she will then advise you on how to best get out of debt.

This is typically the first step in a DMP, though credit counseling is available as a stand-alone service.

What the Government and Experts Say

People in the know will tell you that debt-relief programs work. Just be careful which approach you take.

You should be especially wary of debt settlement plans with their high fees and other risks.

“Debt settlement may well leave you deeper in debt than you were when you started,” the Consumer Financial Protection Bureau says on its website.

Experts are more likely to advise credit counseling or a debt management plan. An Ohio State University study found that people who enrolled in a NFCC-sponsored “Sharpen Your Financial Focus” program reduced their revolving debt by $3,637 in 18 months.

FAQs About Debt Relief Legitimacy

Are debt relief programs safe?

It depends on the company and the program you use. The industry has scammers, so check out a company’s credentials.

As for the company’s plan, debt settlement can get you out of debt, but it can wreck your credit score and cost you almost as much as you supposedly saved. A DMP won’t ruin your financial standing, but it requires sacrifice and discipline to successfully complete. Credit counseling should be safe if the counselor is certified.

Can I get out of debt without paying a company?

You do not need a debt relief company to get out of debt. You could take out a personal loan with favorable terms and pay it off. You could get a counselor’s advice and implement it.

Or you could list your resources and expenses, come up with a budget that will eventually pay off your debt, and stick to it. That last part is the key.

Will debt relief programs ruin my credit?

Debt relief programs will affect your credit score. Whether that’s a positive or negative depends on the program you choose and how disciplined you are in keeping up with it.

If it’s a debt settlement plan in which you negotiate a reduced amount of debt and pay it off in one lump sum, it will be listed as “settled for less than full amount” on your credit report and stay there for seven years. That could cost you 100 points or more on your credit score.

If the program calls for a bankruptcy filing, that’s a huge hit to your credit score, as much as 100-200 points and is a negative mark on your credit report for 7-10 years.

On the other hand, if you go through a debt management plan and don’t miss any payments, your score will gradually improve.

If you get effective credit counseling and stick to the plan they offer, you definitely will see your credit score go up.

How long does it take to see results?

Again, that depends on which debt relief company and plan you choose. If you go with debt settlement, a lot depends on how many creditors you have and how much you owe.

The first settlement typically takes a few months, but the entire process of settling all debts usually takes 2-3 years or longer.

A debt management plan usually takes 3-5 years to complete. But if followed successfully, you’ll see results like a better credit score and more financial discipline along the way.

With other options like credit counseling or a debt-consolidation loan, the speed at which you’ll see results will depend largely on how faithfully you follow the program.

It could be a few weeks. It could be never.

As with all debt relief, success is largely up to you.