Should I Use a Debt Relief Company?

by | Dec 18, 2019

There’s a big issue when it comes to debt relief companies: it’s hard to tell who is a good guy. Heck, even the language is confusing because debt relief, debt consolidation, debt settlement and credit counseling often get used interchangeably, though they’re actually quite different. 

Debt consolidation is what you do with a personal loan when you bundle various debts together to pay them off on a simple, understandable timeline with a fixed interest rate. The loan is issued by a bank, credit union, or online lender. However, people often confuse this with debt relief or debt settlement. 

The term debt relief often gets used to describe debt settlement companies. Certain debt settlement programs will also call themselves ‘debt consolidation programs’ and then use the term “relief” in the name of the company. Confusing, I know.  

Debt settlement is when you hire a third-party to help negotiate on your behalf with creditors or debt collectors. Depending on the tactics used, it can do damage to your credit score because sometimes you’re advised to stop making payments, which could also end up with you getting sued. Plus, the service fees for engaging with a debt settlement company aren’t always cheap. In the last piece of bad news, it’s important to note that if your debt gets forgiven, the amount of the canceled debt could end up being taxable, which means you would have to report the canceled debt on your tax return for the year the cancellation occurs.

Credit counseling is often provided by non-profit organization that helps you better manage your money and get yourself on a payment plan to handle your debts. They don’t advise you to stop making payments like debt settlement companies often do, so your credit score won’t get crushed. 

 

Understand the promises or guarantees made to you 

Should you elect to work with a debt settlement company, you need to be really clear on the tactics and potential implications as well as the promises and guarantees being made to you. Technically, these companies aren’t allowed to promise certain results, so be wary of those that do. You want to get everything in writing before engaging. You may also find that your specific creditor won’t work with a third-party, so be sure to never pay a debt settlement company upfront. Last but not least, be wary of debt settlement companies that advise you to stop making payments, as those “late” payments will be reported to the credit bureaus, which will lead to a drop in your credit score.  

 

Find a non-profit option 

If you decide that you want to work with someone, then credit counseling is likely the better route and you should find a non-profit organization with which to work. One such example is the National Foundation for Credit Counseling, the NFCC. 

 

You probably can handle this yourself 

A lot of the work that’s done by a debt settlement company is something you’re perfectly capable of handling yourself. For starters, you can use a personal loan, a balance transfer, or the debt snowball or avalanche techniques as we’ve outlined. If you have a debt in collections, you don’t need to hire someone else to help you out. You can negotiate with a collector yourself. Just make sure you get the agreement in writing before making any payments. 

Some credit counseling organizations offer free workshops and classes, which is a good starting point if you’re stressed out and want some guidance without committing to a third-party service. 

Be sure to also do your research with sites like ConsumerFinance.gov and the FTC to better understand all your rights, your options, and the potential red flags. 

 

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