When you’re in over your head with debt, you might feel there is no way out. In those cases, turning to a debt settlement company might be a good option. But be aware of all your options, and study the terms and fees involved, as well as any impact a settlement might have on your credit score. Here’s what you need to know to find a reputable debt settlement company.
Simply put, a debt settlement is an agreement to pay your creditors less than you owe. And reputable debt settlement companies can help you do this.
While debt settlement does hurt your credit score, it is better than declaring bankruptcy. It can also signal to future lenders that you’re serious about settling your debts.
Keep in mind, debt settlement companies are different from debt consolation companies. Debt consolidation companies seek to combine all your debt with one creditor, usually at a lower interest rate than before. Debt settlement companies seek to lower your debt with individual creditors.
But before you proceed, it’s important that you know if debt settlement is the right option for you – and if it is, how to choose a legitimate, trustworthy debt settlement company.
Is a Debt Settlement Company Right for You?
Enlisting the help of a debt settlement company only makes sense if your debts are large (usually more than $7,500). If your debts are large, the amount you pay a debt settlement company will be less than the overall amount you owe.
That’s the benefit of these firms. Because debt settlement companies employ professionals with specialized training and experience in negotiating settlements, you are usually able to get a better deal with creditors than you would otherwise.
Research the Company’s Reputation
If you’re ready to hire a debt settlement company, do your research. See if they’re accredited by the American Fair Credit Council (AFCC). In addition, search the company with the National Association of Attorneys General and your local consumer protection agency.
Ask if the company is licensed to work in your state. Also, ensure there are no other consumer complaints on file about the company.
Check whether the company has been involved in any lawsuits with regulators or has been charged with deceptive or unfair practices.
What are the Terms and Fees?
Debt collection agencies are prohibited from charging any upfront fees before they settle your debt. Steer clear of any firms that do.
Some may charge monthly maintenance fees. The best companies only charge performance-based fees. Under those fees, you would not pay if the company does not successfully settle your debt.
Make sure you understand the settlement terms and the monthly payments you have to pay. When you work with a debt settlement company, you may be asked to set aside funds in a separate bank account. Those funds are still yours. You are entitled to the interest on those funds and can withdraw them at any point.
Debt settlement firms must tell you how much money or what percent of your outstanding debt you have to save before it negotiates with a creditor on your behalf. Don’t forget to ask what that amount is.
Be aware of all the fees the company can charge. Every time the debt settlement firm settles a debt with one of your creditors, it can charge you a portion of its full fee. Some may charge a fee that’s a percentage of the total amount you save through the settlement.
Make sure they are explicit when explaining what fees they charge and any conditions attached.
Beware of Overpromises
When searching for an organization to help you, keep in mind that many so-called debt settlement companies have been found to be little more than scams. Some promise to settle all your debts for just a small fraction of what you owe. Or they say they can erase your debt in one year. (Two to four years is more common).
Others deceive consumers about the risks involved. They may not tell you, for example, that most consumers don’t settle their debts and debt collectors may continue to call. According to the Federal Trade Commission, don’t work with any debt settlement company that:
- touts a “new government program” to bail out your personal credit card debt
- guarantees it can make your unsecured debt go away
- tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
- tells you it can stop all debt collection calls and lawsuits
- guarantees that your unsecured debts can be paid off for pennies on the dollar
How Much Guidance Will You Receive?
The benefit of enlisting a debt settlement company is that you have professionals on hand to answer your questions and concerns. Go with the company that makes you feel comfortable.
Look for companies that have dedicated professional advisors or arbitrators. Check if they’re accredited by the International Association of Professional Debt Arbitrators (IAPDA) or the American Fair Credit Council (AFCC).
The firm must also educate you about the risks involved in debt consolidation. For instance, if the company asks you to stop paying your creditors, it should tell you about the negative consequences. That might include lowering your credit score or having your credit card company charge you additional fees.
Which are the Best Debt Consolidation Companies?
There are legitimate debt settlement and consolidation companies out there. Debtmerica Relief, National Debt Relief, and Pacific Debt Inc. are some of the highest-rated ones, according to our research.
Debtmerica Relief has helped 20,000 consumers lessen their debt burdens on credit cards, personal loans, business loans, collection accounts, and medical debt.
National Debt Relief<
National Debt Relief has helped over 100,000 families with services, such as debt settlement and credit counseling. It charges a fee of 20% of the initial balance amount, though that fee can vary based on how much you owe and how much relief the company helps you achieve.
Pacific Debt operates in 27 states and has a fee that works out to about 4-8% of the debt when calculated over the course of a three- to four-year program.
All of these companies will work with you to figure out how much you can legitimately pay off each month. They will take stock of your entire financial situation. They won’t require upfront fees and will not overpromise.
These are the things you should not compromise on when looking for a company to help with your debt issues.
Struggling with debt problems can seem overwhelming. It doesn’t have to be. Armed with enough knowledge about the types of solutions out there, you can make better financial decisions for your family and your financial future.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.