What is a debt relief program and how do I know if I should use one? | Consumer Financial Protection Bureau (2024)

FAQs

What is a debt relief program and how do I know if I should use one? | Consumer Financial Protection Bureau? ›

Debt relief companies, sometimes called debt settlement companies, are one option for those struggling with credit card debt, tax debt, personal loan debt and other types of unsecured debt. These companies can help you manage certain types of debt, but they won't be the right solution for everyone.

Debt relief or settlement companies are companies that say they can renegotiate, settle, or in some way change the terms of a person's debt to a creditor or debt collector.

If you're juggling multiple high-interest debts, such as credit cards, personal loans or medical bills, it might be time to consider a debt relief program.

If a debt relief organization you're considering demands upfront payment, guarantees to settle your debts for a fraction of what you owe, refuses to send free information about its services, or promises to stop all debt collection calls and lawsuits, steer clear. Those are red flags that indicate a possible scam.

Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.

A debt relief program could involve: Wiping the debt out altogether in bankruptcy. Using a debt management plan to get changes in your interest rate or payment schedule. Negotiating with creditors to settle the debt for less than the full amount owed.

They Ask for Fees Upfront

This is the most obvious sign of a debt relief scam. If the person/company offers to help get rid of your debt but first you have to pay them a fee, they're probably lying to you. Cut off contact and file a complaint with us.

Drawbacks of Debt Settlement:

Adverse impact on credit score: Post-settlement, re-establishing credit to secure loans or make major purchases can take up to seven years. No guaranteed savings: Creditors aren't mandated to settle, which can lead to legal repercussions or involvement of collection agencies.

If you have a good credit score or better, want to simplify your finances, prefer fixed payments and can afford the monthly cost, debt consolidation may be a good option for you.

How much does it cost to use a debt relief program? ›

Debt Settlement Company Fees

Their account set up and management fees typically amount to 15% to 25% of the total debt you owe, and many companies won't work with you unless you owe $10,000 or more on credit cards. If you owe a total balance of $10,000, the bill would equal $1,500 to $2,500.

Debt relief can be a lifeline to help you get out from under unaffordable debt—but it can also damage your credit. So, if you're considering a form of debt relief, you'll want to bear in mind its effect on your credit report, where the information can stay for up to 10 years.

Outside of bankruptcy or debt settlement, there are really no other ways to completely wipe away credit card debt without paying. Making minimum payments and slowly chipping away at the balance is the norm for most people in debt, and that may be the best option in many situations.

Using debt settlement options to reduce debt comes with several risks, including late payments on your credit report, potential charge-offs, settlement company fees, tax implications on forgiven balances, possible scams and the overall risk of settlement offers not working.

Ask about the fees for their service. Debt settlement companies are not permitted to charge upfront fees. They can't collect any fees until they've settled a debt. Is the fee based on the original debt amount or the settled debt amount?

Stopping payment on a debt means you could face late fees and accruing interest. Additionally, just because a creditor agrees to lower the amount you owe doesn't mean you're free and clear on that particular debt. Forgiven debt could be considered taxable income on your federal taxes.

Cancel student debt for borrowers who entered repayment a long time ago. Borrowers with undergraduate debt would qualify for forgiveness if they entered repayment 20 years ago or more, and borrowers with graduate school debt would qualify for forgiveness if they entered repayment 25 years ago or more.

Founded in 2009, National Debt Relief has assisted consumers with unsecured debts for 15 years. They work with customers with at least $7,500 in unsecured debt, such as credit cards, personal loans, medical bills, business debts and private student loans.

Working with a relief company will typically result in an immediate negative impact on your credit score. The degree to which your score drops depends on the relief method you choose and whether your creditors decide to report it.

Under the terms of a debt management plan, while you may receive more favorable interest rates or relief from fees, you still repay the entire principal amount owed.