What is a debt relief program and how do I know if I should use one? | Consumer Financial Protection Bureau (2024)

FAQs

What is a debt relief program and how do I know if I should use one? | Consumer Financial Protection Bureau? ›

Debt relief companies, sometimes called debt settlement companies, are one option for those struggling with credit card debt, tax debt, personal loan debt and other types of unsecured debt. These companies can help you manage certain types of debt, but they won't be the right solution for everyone.

Debt relief or settlement companies are companies that say they can renegotiate, settle, or in some way change the terms of a person's debt to a creditor or debt collector.

You may consider debt relief if: You're behind on credit card bills or other loan payments. You're not behind on bills yet, but you're struggling to afford your payments.

If a debt relief organization you're considering demands upfront payment, guarantees to settle your debts for a fraction of what you owe, refuses to send free information about its services, or promises to stop all debt collection calls and lawsuits, steer clear. Those are red flags that indicate a possible scam.

Debt relief programs and strategies aim to resolve credit issues caused by built-up debt. But, much like the debt itself, the relief option you choose will impact your future finances. You could be left with hefty fees or even more damage to your credit score.

A debt relief program could involve: Wiping the debt out altogether in bankruptcy. Using a debt management plan to get changes in your interest rate or payment schedule. Negotiating with creditors to settle the debt for less than the full amount owed.

They Ask for Fees Upfront

This is the most obvious sign of a debt relief scam. If the person/company offers to help get rid of your debt but first you have to pay them a fee, they're probably lying to you. Cut off contact and file a complaint with us.

Drawbacks of Debt Settlement:

Adverse impact on credit score: Post-settlement, re-establishing credit to secure loans or make major purchases can take up to seven years. No guaranteed savings: Creditors aren't mandated to settle, which can lead to legal repercussions or involvement of collection agencies.

If you have a good credit score or better, want to simplify your finances, prefer fixed payments and can afford the monthly cost, debt consolidation may be a good option for you.

How much does it cost to use a debt relief program? ›

Debt Settlement: 30 Days or More

Late payments remain on credit reports for seven years before being removed. Payment history makes up about 35% of your FICO Score. If you're late on payments and that gets reported to the credit bureaus, it can seriously affect your score.

Outside of bankruptcy or debt settlement, there are really no other ways to completely wipe away credit card debt without paying. Making minimum payments and slowly chipping away at the balance is the norm for most people in debt, and that may be the best option in many situations.

Using debt settlement options to reduce debt comes with several risks, including late payments on your credit report, potential charge-offs, settlement company fees, tax implications on forgiven balances, possible scams and the overall risk of settlement offers not working.

Ask about the fees for their service. Debt settlement companies are not permitted to charge upfront fees. They can't collect any fees until they've settled a debt. Is the fee based on the original debt amount or the settled debt amount?

Stopping payment on a debt means you could face late fees and accruing interest. Additionally, just because a creditor agrees to lower the amount you owe doesn't mean you're free and clear on that particular debt. Forgiven debt could be considered taxable income on your federal taxes.

If you have loans that have been in repayment for more than 20 or 25 years, those loans may immediately qualify for forgiveness. Borrowers who have reached 20 or 25 years (240 or 300 months) worth of eligible payments for IDR forgiveness will see their loans forgiven as they reach these milestones.

Debt forgiveness is a process where a creditor pardons a debtor from part or all of their outstanding debt. Various types of debt may qualify for forgiveness. Debt forgiveness can offer relief from overwhelming financial burdens, but it does have downsides. There are alternative options for managing debt.

Debt relief involves consolidating or negotiating your debt to make it more affordable. Depending on your situation, you may consider debt consolidation, a debt management plan, debt settlement or even bankruptcy.

If you're behind on your credit card payments and looking for a solution, you might be considering debt settlement, which promises to help clear your debts. However, debt settlement is risky and should be a last resort for most borrowers.