You’re over your head in high-interest credit card debt and try as you might, you cannot get out on your own. Debt relief is a financial strategy that could give you a clean start. Here’s how it works.
What Do Debt Relief Companies Do?
These are companies you pay to negotiate with your credit card issuers or other creditors on your behalf to get them to accept less than what you owe them to settle your debt.
While the company is negotiating, you likely will be asked to stop paying your creditors and instead deposit cash monthly into an escrow-like account that you control. After the parties reach agreement, the deposited funds will be used to pay the creditors, then the company for its services. That’s how debt relief works.
The company is not guaranteed to be able to reach a debt settlement agreement for you, although creditors you’ve not paid in months will likely be motivated to sign on. These creditors also know that if you file for bankruptcy, they get nothing.
Benefits of Debt Relief
Your debt – most of it from high-interest credit cards – is completely out of control. If it hasn’t already, it’s going to affect nearly every area of your life. Debt relief offers a chance to wipe your financial slate clean by lowering your debt amount. See debt relief reviews.
The strategy also gets creditors and collectors off you, and helps you avoid bankruptcy, a legal proceeding that will negatively affect your credit and stay on your credit report for 10 years.
Risks of Debt Relief
The solution is not for everyone. Because most programs encourage you to stop paying your debt, you could wind up with late fees, interest, even lawsuits. You also may face taxes on the portion of your debt that’s forgiven.
Also, your credit score could take a substantial hit due to the missed payments. This is not to be considered lightly, although your credit may already be damaged by this point.
What to Look For In a Debt Relief Company
Because of the risks, debt relief – also called debt settlement – isn’t usually recommended as a first option. But if you need the service, some agencies are better than others. In fact, there’s no shortage of unscrupulous companies out there that, if you aren’t careful, can worsen your problem. These scammers offer sham guarantees and ask you to pay them before they perform any service.
Freedom Debt Relief
On the other hand, there are reputable companies that legitimately work to put you in the red. One of those is Freedom Debt Relief (FDR) – the largest debt settlement company in the nation. FDR requires you to have at least $7,500 of outstanding unsecured debt to enroll in its program, which typically takes between two and four years to complete.
There are no upfront fees, but the company does charge between 15% and 25% of total settled debt, although the amount varies depending on your state. For instance, if FDR whittles your $7,500 debt to $4,000, you owe FDR between $600 and $1,000.
The company has been around since 2002 and has resolved more than $10 billion in debt. It also is a founding member of the American Fair Credit Council, which promotes best practices in the credit advocacy industry.
Accreditation and longevity mean a lot in the debt relief industry and is something you should look for.
So, now you know how debt relief works. If you feel like it’s a solution that would work for you, take action now and put yourself on a better financial path.