The answer is often to ask borrowers to increase the interest rate and reduce monthly payments.
Occasionally, it requires the lender to reduce the amount owed significantly.
Often, the lender is asked to extend repayment terms to another year or two.
Whatever form it takes, a debt-relief program aims to halt the confusion, dissatisfaction, and distress that consumers face with overwhelming debt. Doing the right work and choosing an effective debt-relief plan is a significant first step in regaining control of your finances.
Five Types of Debt Relief
There are five primary ways of debt relief. Although the strategies and timeline differ for each, it is best to give 3-5 years to wipe out the debt and restore your reputation.
Here are five possibilities:
- Credit counseling. Debt reduction is often as easy as building a budget to see where the money comes and goes, and cutting back where wasteful spending is involved. Sadly, a strategy only works out of 40 percent of customers. Counselors from nonprofit agencies are experts at budgeting and provide this service for free.
- Debt consolidation. Gather and merge all of your unsecured debts (i.e., credit card bills) into one monthly payment. When your credit score is high enough, the interest rate and monthly payment will be lower.
- Debt management. A private credit repair service works with lenders to lower the interest rate on your loan (sometimes dramatically) and lower the monthly payment to a point you can afford. Credit scores are not a factor in entering the system, but any benefits you have received may be revoked if you skip payments.
- Debt settlement. A business is negotiating to settle a loan with the lenders for less than what is owed, which sounds too good, honest, and generally. The borrowers are not expected to pay, and some have won Lenders are not obligated to pay, and some won't. Also, your credit report is damaged for seven years.
- Bankruptcy. This is a last-ditch choice when the other four won't work. However, if it's going to take over five years to pay all your bills with one of the other four options, this is a workable solution. You get a second chance, a fresh start, and hopefully, you've learned enough not to repeat mistakes.
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Counseling/Advising Services
A debt management plan can be carried out on your own, but few customers have the knowledge and expertise to do it effectively.
It is here that therapy programs come in.
That is where counseling services come in.
Credit counseling agencies are nonprofit organizations that educate consumers on understanding budgets, credit, money management, and how to eliminate debt.
Credit advisors interview clients to collect information about their profits, expenditures, and debt obligations. We also do a "soft" test on credit reports to verify authenticity and up-to-date information.
Some of the services they provide include:
- How to develop and live on a budget
- Education material on credit reports and how they affect your finances
- How to improve your credit score
- How to manage money
- Advice on how to pay off debt
How to Find a Legitimate Debt Relief Company
A recommendation from family or friends is usually the best way to find a reliable business. Still, debt relief is a difficult conversation subject for most people, so that might not be the easiest route.The safest place to go is the National Federation of Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Each organization has member companies from all over the country that provides recommendations geared to serve consumers' best interest.
Counselors must pass the training and certification process to work with consumers. The counselors go through a continuing education program and must be re-certified every two years. This helps keep counselors current on debt-relief programs.
Please don't deal with any credit counseling agency unless they can prove their counselors are trained and certified.
Fraudulent Claims
Beware advertisements or commercials where debt-relief companies claim they can settle or eliminate your debt for pennies on the dollar. It might happen in exceptionally, very rare circumstances, but more likely, you are going to end up getting scammed.
The first tip that you are involved with a bogus operation is when the company asks for money upfront. They want you to pay them before they do anything to eliminate your debt. That is a violation of federal law.
Debt-relief companies can't accept payment until they can prove a debt has been satisfied. If a company asks you for an upfront payment, report them to the state attorney in your area or file a complaint with the Consumer Financial Protection Bureau.
Also, do not believe any "guarantee" claims made by debt-relief companies. Lenders aren't obligated to accept a settlement offer, so there is no guarantee that your debt will be reduced or eliminated. If you hear a "guarantee," consider moving on to another company.
Another claim to watch for is a company that says it can settle secured debts. Ask for proof that confirms the claim. Obligations are secured by collateral such as a home, car, or boat. It's highly unlikely the lender would accept "pennies on the dollar" when they can seize the home, car, or boat and sell it to get back money owed.
If a debt-relief company makes suspicious claims, ask for documented proof. Don't be afraid to challenge them. If they are honest, showing you evidence won't be a problem. Don't dig a deeper financial hole by trusting a company that makes claims too good to be true. Verify information before you agree to do business with them.
Illegal Business Practices
The debt-relief industry took some hits in the early 2000s because of scams that got several companies in trouble with the law and prompted passage of the Telemarketing Sales Rule (TSR) in 2003. It also was a factor in the enactment of the Dodd-Frank Consumer Protection Act that passed in 2010.
The Telemarketing Sales Rule, among other things, prohibits debt relief providers from charging their customers upfront fees before reducing or settling a customer's unsecured debt.
The TSR bill was updated in 2010 and forbade companies from misleading customers on the services provided, specifically, how long the program lasts and what the fees involved will be Companies also can't prevent the customer's from accessing the "dedicated accounts" used to build funding for attempts at settling a debt. The money in those accounts belongs to the customer and is available for withdrawal without penalty.
Some of the illegal practices prohibited include banning debt relief companies from withholding access to escrow accounts used to build funds for a debt settlement and withholding information on how long it will take to get a resolution.
