Debt relief companies (or debt settlement companies) offer people a workable way out of their financial problems. These companies negotiate with creditors on your behalf. They get your lenders to accept less than what you owe in exchange for settling the debt. The debt relief company asks your lender to lower the interest rate, reduce the amount owed, or ask the lender to extend the repayment terms. The goal here is to stop the chaos, confusion, and anxiety that you experience with overwhelming debt. Here is everything you need to know about debt relief companies.
1. Types of Debts That Qualify
If you are in a financial crisis and need help, you probably strive to consolidate your debts and seek debt relief. However, this approach sometimes does not work because debt relief programs do not handle all types of debts. The only debts these companies handle are unsecured and secured debts. Secured debt is tied to an asset, while unsecured debt is not linked to any tangible asset. Unsecured debt includes credit card debt, personal loans, and private student loans. Secured debts include vehicles, mortgages, and some federal student loans.
2. How Does Debt Relief Work?
You opt for debt relief or settlement when you have many late or skipped payments and collection accounts. No collector accepts less than what you owe if they believe you can pay the full amount. This causes your credit score to decrease and your feelings of hopelessness to increase. Additionally, your income does not keep up with your debt obligations. A debt settlement company then negotiates with your creditor to reduce what you owe. However, the settlement only happens when it seems you cannot pay. So, you stop paying your debts and open a savings account where you put a monthly payment. Once the relief company believes that the account has enough for a lump-sum offer, they negotiate with your creditor to accept a smaller amount.
3. When to Consider Debt Relief
People turn to debt relief programs when they have no other options. This strategy harms your credit rating and is your last resort. If you think you can repay your debts within five years, a debt relief company helps you negotiate a repayment plan. They consider consolidating your debts with a lower interest credit card and follow a strict budget until you repay your debts.
4. Choosing a Debt Relief Company
You probably need a debt relief company if your debts are out of control. The debt relief industry is known for shady operators. So, it is best to watch out for companies that demand large fees and deliver unsatisfactory results. A recommendation from family or friends is the best way to find a reliable business. However, that is not the easiest route for everyone since debt relief is a challenging conversation. The safest way is to go to the National Federation of Credit Counseling or the Financial Counseling Association of America. These organizations provide recommendations geared to serve your best interest. Also, search for the best relief companies to help you settle your debt.
5. Fraudulent Claims
One tip for knowing when you are dealing with a scammer is when the company asks for money upfront. The company wants you to pay before they do anything to eliminate your debt. This violates federal law and keep away from such operators. Debt relief companies only accept payments when they prove that they satisfy a debt. Also, watch out for companies that guarantee debt relief. Lenders are not obligated to accept settlement offers. So, no one can guarantee that they reduce or eliminate your debt. Always ask for documented proof if a company makes suspicious claims. They provide the evidence if they are honest with their work.
6. Alternatives to Debt Relief
If unsecured debt overwhelms you, consider debt settlement and Chapter 7 bankruptcy options. The latter is always a better option. Although the bankruptcy stays on your credit report for years, you immediately begin rebuilding. If you do not qualify for bankruptcy or do not want to file one, consider debt management offered through non-profit credit counselors. This option often does not reduce the amount you repay, but it reduces your monthly payments.
Ensure you choose the best debt relief company if you decide to go this route. Avoid scammers by observing the above tips, and you will get out of debt.
