DebtQuote

Debt relief programs are designed to assist consumers in managing and reducing their debt burden. Basically, a debt relief program means that your creditors agree to consider a debt paid in full for less than what you owe them.

How Does A Debt Relief Program Work?

Debt relief typically involves enrolling your unsecured accounts into a debt relief program with a debt relief company. You stop making payments to your creditors, letting your account go delinquent. Meanwhile, you and your debt consultant review your finances to agree on an amount that you can afford, and you put that money into a debt settlement savings account each month. When your consultant feels that you have saved enough, negotiations with your creditors can begin. You continue to make your monthly payments into your debt settlement savings account while your debts are settled. There are no fees until a debt is settled for you. Debt relief programs can help you get out of debt faster but you can speed up the process by cutting expenses or selling things you don't need to reach your goal faster.

Why Would My Creditors Agree To Settle My Debt?

You might be asking yourself what do creditors gain from settling your debt, since they are not in the business to lose money. They only agree to a debt relief program if they are convinced that other options will cost them more or that you can't pay what you owe. Creditors are less likely to settle if you have kept up with your payments and have a good credit score. They assume that you'd want to protect that score and that you can afford to do so.

However, when you start missing payments, it becomes evident that you're having trouble paying what you owe. Creditors begin to fear that you might give up or file for bankruptcy and pay nothing (or practically nothing). The statute of limitations could kick in for older debts and make it uncollectible. Once a creditor reaches the conclusion that something is better than nothing, you have a higher chance of reaching a settlement.

How Long Does A Debt Relief Program Take?

Depending on the amount of debt you enroll, how fast you can save for debt settlement and how much your creditors are willing to accept, debt relief generally takes between two and four years. Debt consultants can help you estimate a time frame after reviewing your situation. The first account can usually be settled in four to six months. Over time, debt relief programs negotiate to help you get out of debt you cant afford.

What Kinds Of Debt Can I Settle With A Debt Relief Program?

Credit card debt.
Unsecured personal loans.
Medical bills.
Private (not government-guaranteed) student loans.
Peer-to-peer (P2P) loans.

What's The Difference Between An Original Creditor, A Debt Buyer, And A Collection Agency?

When trying to settle your debts, you could be dealing with the original creditor, a debt buyer, or a collection agency.

Original creditors are the people or companies that you borrow from, for example banks that make personal loans or credit card issuers. The Fair Debt Collection Practices Act (FDCPA) protections do not apply to original creditors.

Your debt collectors are required to leave you alone once you ask them to stop contacting you, but original creditors may be able to keep calling you. Each state has different laws in place that may protect you from aggressive collection efforts from your creditors.

Collection agencies are in the business of collecting debt for others. They may charge a fee to the original creditor for collecting or the original creditor may sell the debt at a discount to the agency. The Fair Debt Collection Practices Act (FDCPA) protections do apply to debt collectors and they must stop contacting you if you ask them to.

Debt buyers purchase the right to collect from the original creditor or collection agencies and own the debt. So they have the same legal rights as original creditors, unless their main business is debt collection. If it is, they fall under the FDCPA, like collection agencies.

Knowing who owns your debt matters because it can impact the amount of contact you get when you're in a debt relief program. It may also determine how willing the debt holder is to settle. If a debt buyer bought the debt at a discount, they may settle for a modest amount, but your credit company will probably be after you for the entire balance, especially if you recently charged expensive purchases. So it may determine how much the debt holder is willing to accept.

Is A Debt Relief Program A Good Idea?

Debt relief programs are a solution for serious debt problems, they aren't for everyone. People who just don't want to pay what they owe shouldn't think of debt relief as a get-out-of-jail-free card. Consider all the advantages and disadvantages of debt relief before committing to a program.

If you can't afford the minimum payments on your debt, or if your debt is creating hardship for you, a debt relief program may help you get out of debt. If you don't want a public filing, if you had a previous bankruptcy or if you don't want a bankruptcy court taking total control of your finances, debt relief can be the right solution for you.

How Does A Debt Relief Program Affect My Credit?

Most debt relief programs require you to stop making payments to your creditors and pay into a debt settle savings account instead. Keep in mind that every missed payment will lower your credit score.

This can be devastating for people with high credit scores. But if you're already having trouble paying your bills and missing payments, the damage is already done. With a lower score, it'll be less obvious.

But a study by the American Fair Credit Council concluded that clients that graduate from a debt relief program typically improve their scores by 60 points within six months after settling their last debt and their score may continue to rise after that. There are no guarantees, your result will depend on how you choose to manage your debts in the future.

After getting rid of debt, your life should be more affordable. With sound financial management and a bit of luck, you should be able to pay your bills on time and continue to improve your credit score.

Can I Negotiate With Creditors Myself?

If you decide to negotiate with your creditors yourself, here are some steps that you should follow:

Make a list of the amounts owed to each creditor and the minimum monthly payment. If you’re dealing with collection agencies, they’ll probably demand the entire balance owed.
Review your budget. Go through your after-tax monthly income and every necessity cost you have in order to get rid of any expenses you don’t need to live when you start your debt settlement plan.
Subtract your total required living expenses from your after-tax monthly income. That will be the amount you can afford to use for debt settlement.
Find out how much money you can offer your creditors to settle your debt. To start your settlement fund, consider selling things you don’t need, borrowing against your 401(k), or tapping your savings.
What comes next is the hard part: stop paying your creditors. This is necessary because few creditors will settle an account when you make payments. Instead, those amounts will go into your debt settlement fund.
You can usually expect phone calls, letters, voicemails, collection calls at work, calls to your cell phone, even texts and contact through social media from your creditors. There’s a possibility to limit some of this contact by sending cease- and-desist letters.
Once you have enough funds, contact your creditors and negotiate an amount to clear your balance. Convince your creditor that you cannot afford to pay more by supplying proof of your financial hardship. Do not pay any money until you have a signed, written agreement.
Work with each creditor one by one until you clear your balances.

Keep in mind that your creditors are not obligated to settle with you and may even take you to court. If you lose, you’ll owe your balance, probably collection fees and court costs, and your creditor may be able to garnish your paycheck.

How Much Can I Save With A Debt Relief Program?

No creditor is under the obligation of settling with you. Reputable companies will not guarantee that it can “wipe out” your debts or clear your balances for “pennies on the dollar.” Your results will likely depend on how old the debt is, the type of creditor, and how well you present evidence of financial hardship.
You're more likely to succeed at debt settlement if you can show that you are insolvent and a good candidate for bankruptcy. Statistics can help you estimate the potential for savings through debt settlement, but your experience cannot be guaranteed or predicted. On average, consumers settled balances of $17,032 for $8,365, paying fees of $3,325. That’s a reduction of 51% before fees and 31% savings after fees, according to a recent study by Will S. Dobbie at the Harvard Kennedy School entitled “Financial Outcomes for Debt Settlement Programs: Estimates for 2011- 2020.”

Debt Relief Pros And Cons

Debt relief programs may help you pay off unaffordable debt. But remember that there is a price to pay for solutions like that. If you are able to repay your debt in a reasonable timeframe, consider doing so.

Debt Relief Pros

Pay off unsecured debt faster.
Pay a reduced amount.
Control how much you offer creditors.
Keep your debt problems private by avoiding bankruptcy.
Your credit score would be less negatively impacted than with bankruptcy, according to Experian.

Debt Relief Cons

Creditors may contact you aggressively while you aren’t making payments.
Creditors may sue you. Success is not guaranteed.
Credit score will drop when you start missing payments.
Forgiven amounts may be taxable.

Forgiven amounts are usually not taxable when you’re insolvent, so it’s wise to consult with a tax professional before choosing debt relief to determine if you meet the guidelines for insolvency.

What's It Like To Go Through Debt Relief?

Each experience with a debt relief program is unique. It's so highly individual because it depends on how quickly you can come up with a lump sum, how old is your debt, who your creditors are, how aggressive your creditors are, the size of your debt and how much income you have available.

In a typical debt relief experience with a debt relief company, there are some steps you should follow. First, the company must provide thorough information about its program, including:

Debt Relief Pros

Debt relief fees and any debt relief services conditions
How long it will take to make a settlement offer to each creditor
How much money or the percentage of each balance you must save in order to begin making settlement offers
What could happen while you’re withholding payments to your creditors – such as damage to your credit score, possible lawsuits from creditors, and interest and penalties added to your balance

The debt relief company must also inform you that:

The money you deposit with your plan is yours, and you are entitled to any interest accrued. You may also withdraw it without penalty, at any time,
There is no affiliation between the account administrator and the debt relief provider, and there are no commissions for referrals.

You will work with your debt counselor to figure out what debts to enroll in the plan and develop an affordable monthly plan payment. You’ll also look for alternatives to increase what you can offer your creditors, it could be a loan, tapping your savings, or selling some assets. Your counselor will probably advise you to stop making monthly payments on your enrolled accounts.

Your debt consultant may give you advice about handling calls from creditors and debt collectors. Federal law gives you total control over how much contact you get from creditors, but credit card companies will probably continue to call you. You may communicate with your creditors during this time if you choose.

According to data from Freedom Debt Relief, your credit score is likely to drop substantially during the first few months of your debt relief program, but this is only temporary. After the first six months, credit scores tend to bounce back up.

Debt Relief Scam: Red Flags

Unfortunately, debt relief is a financial service with lots of government oversight. The Federal Trade Commission (FTC) warns consumers about these red flags when dealing with a debt relief company:

Asking for upfront fees before settling any debts – by law, debt relief companies cannot charge you until they have negotiated a settlement and you have agreed to it
Claiming to be able to “wipe out” your debt for “pennies on the dollar”
Offering guarantees that they can settle your debt for any specific percentage
Advertising a "new government program" to bail out personal credit card debt
Telling you to stop all communications with your creditors
Claiming being able to stop all debt collection calls and lawsuits

Debt relief may be able to solve your debt problems, but it’s not a walk in the park. You should steer clear from companies that try to present an unrealistic picture or collect fees they have not earned.

What Happens After Graduating From A Debt Relief Program?

You graduate from debt relief when your last enrolled debt is settled. You are free to move on with your life, keep good habits and avoid taking on too much debt in the future. Remember you may owe taxes on forgiven debt under a debt relief program. Unless you are financially insolvent, the IRS considers forgiven debt taxable for the year settled. That's why it's important to determine if you qualify as insolvent, or if budgeting is needed for those taxes. According to Freedom Debt Relief data, 24% of program graduates had a solid median FICO® score of 680 or greater once they completed the program. And the number more than doubled two years later to 49%. Keep in mind that your credit report might show missed payments, and creditors can note that your account was settled for less than the amount owed, these entries remain for up to seven years. These may raise some questions when you apply for a mortgage or auto financing. Luckily, credit scores update continuously, and recent history gets more weight than older entries. As long as you keep paying your account on time, and avoid carrying balances on your credit cards, you can achieve financial stability and excellent credit.