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|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
2 Important Disclosures for SoFi.
3 Important Disclosures for CommonBond.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 5.87%||Undergrad & Graduate||Visit Earnest|
|2.80% – 6.38%1||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 7.52%2||Undergrad & Graduate||Visit SoFi|
|2.47% – 7.99%||Undergrad & Graduate||Visit Lendkey|
|2.57% – 6.65%3||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.17%4||Undergrad & Graduate||Visit Citizens|