If you feel like the cloud of debt has been hanging over your head for too long, the idea of seeking help from a debt relief program might feel like just the thing you need.
But is it? Is that debt relief company whose ad you saw actually helpful — or is it just a scam? Here’s how you can find out.
How to find out if a debt relief program is trustworthy
Unfortunately, there’s no black-and-white answer regarding the trustworthiness of debt relief companies. But there are a few ways to find out if a particular debt relief program is one you can put your faith in. Consider the following:
1. Understand what debt relief is
Debt relief is an unquestionably vague term, almost as if by design. Meant to describe the result of the product, the term has come to be used by various types of companies.
If you were to research a given “debt relief” company, you might find anything from debt consolidation to debt settlement to debt management services. But they all offer very different things.
Quite often, debt relief companies offer debt settlement. But since it can be hard to tell just by looking at a website, here are some definitions you need to know:
This is one of the most confusing terms because it can be done in many different ways. At its core, debt consolidation is the act of paying off debt with a new loan or line of credit.
While many companies advertise this as a service, you don’t need debt consolidation companies to do this for you. For example, you could refinance your student loans with a refinancing company. Or, if you’re battling high-interest credit card debt, you could use a personal loan to pay off the debt.
Those are just two examples of how you can consolidate debt on your own, with no debt consolidation company needed.
Debt management is a program, usually lasting three to five years, to help you pay off debt. You give the company or nonprofit you’re working with your monthly payments in one amount, and they pay them out to your creditors.
Whoever you’re working with will likely try to negotiate for lower monthly payments, either by extending your repayment terms or lowering your interest rate.
Debt settlement is the act of settling your debt with your creditors for less than you owe. You agree to pay a lump sum, and they forgive the rest of the debt. This can be done with the aid of a company or nonprofit, or you can do it on your own.
Some companies helping you with debt settlement might have you put your monthly payments in escrow rather than paying them to your creditor. This is used as a negotiation and savings tactic, with the idea that your creditor might be more willing to settle if you go into default and then offer to pay a lump sum months later.
That can be a risky strategy. In a debt settlement program, your creditors can still sue you to collect on your debt, and if they win, your wages could be garnished.
2. Research the program
Now that you understand the various types of services debt relief companies might try to sell to you, you can seek out the ones you think would be most helpful to your situation. But your work doesn’t end there.
It’s also important to look up reviews of the debt relief program and the company that offers it. Dylan Ross, director of communications and financial planning for Garrett Planning Network, explains how:
Before signing on with any debt relief company, check them out with the Better Business Bureau, and Google their name followed by the words “complaint” or “scam.” Even if they are reputable, sometimes just knowing what the common complaints have been can help you be more vigilant against them happening to you.
Googling is an excellent way to find reviews. And the Better Business Bureau enables you to see scores and specific complaints. Arm yourself with these tools so you can find a company you trust.
3. Know the laws around debt relief
Once you choose a debt relief program or company (if you do), it’s important to make sure they’re playing by the book. The same goes for laws that could hurt you if you’re not aware of them. Here are a few you need to know:
Debt relief companies aren’t allowed to charge you upfront
In summary, the Telemarketing Sales Rule states that debt relief companies aren’t allowed to ask for or collect a fee from you until they’ve already “renegotiated, settled, reduced, or otherwise altered the terms of at least one debt.”
In other words, the company has to take a concrete action on your debt and deliver some form of a result before they can charge you a fee.
Additionally, they can collect a fee once you’ve made a payment to your creditor under their debt relief program. Some states cap these fees, such as Georgia (which has a 7.5 percent maximum), but typically companies charge 20 to 25 percent, according to MarketWatch.
You could be sued for collections if you stop paying your bills
If you take advice from a financial professional, you might be inclined to think they’ll steer you away from financial harm. But not all financial professionals communicate as clearly as they should.
For example, if a debt relief program advises you to stop paying your bills, they might forget to tell you that creditors can still sue you over the debt. And it could happen without your knowledge.
MarketWatch reports one example of this in which consumers had their wages garnished because they had no idea that their creditors had taken legal action taken against them.
If you stop paying your bills — for any reason — a collections lawsuit could be imminent. Stay on top of all communications you receive from your lender while in a debt relief program. That way you can handle any issues before they go to court (or affect your paycheck).
Forgiven debt might be seen as taxable income
Here’s the kicker: If you’ve worked with a debt relief program and have had some or all of your debt forgiven, you could end up owing taxes on it. That’s because many types of forgiven debt are considered to be a form of income.
If your form of forgiven debt is taxable, you’ll receive a 1099-C form in the mail. It’s important for you to fill it out with the total amount of forgiven debt. If you end up owing more in taxes than you can afford to pay all at once, call the Internal Revenue Service (IRS). They’re often willing to work out a payment plan.
And if you want to see whether your forgiven debt may be considered taxable income before you aim for debt relief, talk to a certified public accountant or tax preparer.
Debt relief: trustworthy or no?
Time for the verdict on debt relief and whether it’s trustworthy: It depends.
Whether you engage with debt consolidation companies or a debt relief program to manage or settle your debt, there’s only one way to know if you can trust it — do your homework.
The Federal Trade Commission (FTC) says to think twice if you see these types of advertisements:
The FTC goes on to mention other methods of handling your debt. They include working out a plan with your creditors, working with a credit counselor, or talking to a bankruptcy attorney.
And finally, the FTC cautions against using collateralized loans (such as a home equity line of credit) to consolidate your debt. If you default on such a loan, you could lose your property.
If you find a debt relief company that has good reviews and is open and communicative with you, then you can take one more precaution: See if they’re part of the American Fair Credit Council. Those who are must abide by a strict code of conduct.
It would be nice if there were a more straightforward answer to the question of whether you can trust debt relief companies. But in the world of debt, you just have to do your research.
Protect yourself and only work with companies that have good reviews, are open and honest with you, and that you feel you can trust.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|