Do Debt Relief Programs Work?

Debt is one of the few things that most Americans have in common. One recent study found that the average US household owes over $132,000, including student loans over $49,000 and over $16,000 owed on high-interest credit cards.[1] Esquire magazine reports that 56 percent of Americans have less than $1,000 saved.[2] That suggests a significant percentage of Americans owe a great deal more than they can pay.

If this is your situation, you're certainly not alone, and assistance or relief probably sound like superb things. Sometimes they aren't: there are far too many predatory "debt assistance" programs out there. Some are little more than a fraud, seeking to prey on individuals in a desperate financial situation. However, many programs do provide high-quality assistance. You need to know the difference before you sign up.

How do Assistance Programs Work?
Many individuals may be looking for complete relief, e.g., complete forgiveness without having to pay for it. It's important to understand that in most cases, this is not possible, at least not without significant consequences. There is no "free lunch," so to speak. However, most assistance programs can deliver key benefits:

Some level of forgiveness
Helping consumers understand their situation
Helping consumers consolidate debt
Helping reduce interest rates
Creating an organized payment plan that is not burdensome

Not all debt is the same, and there is no one way to work your way out of your situation. Before deciding to turn to assistance programs or counselors, you need to start with some basic steps.

Know what you owe. Many consumers have no idea how much they owe. However, it's important to know where your lines of credit are and what you owe on each of them.

Sign up for and receive your credit report. Your credit report is incredibly important. You may have lines of credit that you didn't know were still open. A detailed credit report will tell you that information, and may often provide you with a ballpark number on how much you owe.

See what you can pay off right now. If you have the finances to pay off some of the burden, it's a good idea to attack those before you do debt assistance. Paying off what you can shows that you're serious about your obligations and you're ready to take personal responsibility.

Assistance Breakdown
As stated, there are several debt assistance options available.

Option 1: Call your creditor or bank directly to work out a deal

Yes, this is a real choice, and it can work! Most lenders are willing to negotiate, as a bankruptcy filing will remove most debt and leave them with nothing. Many creditors are often willing to help you work out a deal instead of losing it all.

When you do this, you'll do what is called debt negotiation. Through this, you'll have several options:

Lump-sum payment. The creditor may allow you to make a lump-sum payment for less than you owe if you have the money to do so.

Payment plan. Under this agreement, the creditor may allow you to work out a payment plan that includes a lower interest rate and a cessation of all penalties. However, they will cut off the credit line (which, at this point, should be acceptable to you), and there will be a negative impact on your credit score.

A settlement program. Working out an arrangement that allows you to pay off only a portion of the arrears is considered a last ditch effort before bankruptcy. Note that this will have a deep and negative impact on your credit score, likely for many years.

Forbearance program. If you are facing temporary issues, such as resulting from an accident or temporary loss of work, you can seek to have your creditor allow you to stop payments for a time, or lower interest rates for a time. Forbearance does not involve forgiveness, and you will need to let your creditor know the moment your ability to pay returns.

When working out deals with a credit card company, consider doing all of the following:

Get a complete understanding of your income and your debt.
Be open and honest with your creditor about your situation.
Don't back down from negotiations -- haggle as much as possible.
Get everything in writing!

Option 2: Use an assistance company

All of Option 1 is possible through an assistance company. In most cases, all of the things an assistance company will do for you, you can do for yourself. That said, many of these companies are more skilled at the negotiation process and will, for a fee, help you get the best deal. However, not all are trustworthy.

How do you find a trustworthy assistance company? Do all of the following:

Call your state Attorney General's office and inquire about the company. They will be able to provide information on whether that company has been sued or fined for improper business practices in the past.

Check the company's rating with consumer protection agencies, like your state consumer protection agency or the Better Business Bureau.

Do your internet search and see what others have to say about the company.

When using an assistance company, you should know your rights. By law, these companies cannot collect fees upfront.[3] If any business is trying to collect advance fees from you, do not proceed with the deal.

Different companies may work out different payment methods, and some have adopted an "attorney model," in which they use a lawyer to collect the fees instead. Avoid this! This model was developed to evade the upfront free ban put in place by the FTC. Only utilize a program that collects fees after successfully completing the assistance program.