It can be a relief to realize that debt relief is available. It can help give you a fresh start regarding your finances, after months of coping with unpaid debts or barely making your minimum payments.
In a nutshell, debt relief can help reduce the amount of money you owe to credit card issuers and other creditors through what’s known as a debt settlement. On your behalf, a debt relief company negotiates a settlement that enables you to pay off a fraction of your debt. Many debt relief providers take a percentage of the debt that you agree to settle.
Follow along to learn how debt relief works and how you can qualify for a debt relief program.
What is debt relief?
Debt relief generally means settlement of your debt (for less than what’s owed) by working with a debt settlement company.
Debt relief companies, also known as debt settlement companies, aim to renegotiate, settle or change the terms of debt you owe to a creditor (such as a credit card issuer) or a debt collector, according to the Consumer Financial Protection Bureau.
Debt relief also might mean consumer credit counseling, debt consolidation, balance transfers or bankruptcy. For the purposes of this article, debt relief refers to debt settlements carried out by for-profit companies like National Debt Relief.
How does debt relief work?
Start off by calling a debt relief provider. They can answer any questions you may have and walk you through the program. After you’ve signed up, they will typically ask you to deposit a certain amount of money into a savings account each month based on your enrolled qualifying debt. Once there’s enough money in the account, the debt settlement company works to reach a settlement on your behalf with creditors or debt collectors. Note that credible companies use FDIC-insured providers.
The settlement often involves paying a lump sum of cash from the savings account that adds up to less than what you owe; settlement payments also might be made over a certain period of time. Payment of all of your settled debts might take as little as 24 to 48 months.
A debt relief plan can help you to pay off your debt for a fraction of what you owe. Generally, debt relief companies charge 15% to 25% of the total debt for each account settled. These fees are built into the monthly payments. The National Debt Relief program is performance-based, meaning you will only be charged a percentage after a successful negotiation. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 46% before fees, or 25% including our fees.
What types of debt are included in debt relief?
Debt relief companies primarily handle unsecured debt. This type of debt, which is not supported by collateral, includes:
- Major credit cards
- Department store credit cards
- Gas station credit cards
- Personal loans
- Lines of credit
- Medical bills
- Business debt
- Private student loans
- Repossessions
- Miscellaneous bills
National Debt Relief and other debt relief companies normally don’t settle secured debt, backed by collateral such as a home or car. In addition, past-due taxes and federal student loans typically aren’t included in debt settlement plans.
When should you consider enrolling in a debt relief program?
In general, you should look into debt relief if one of these two scenarios applies to you:
- Paying off your unsecured debt, such as personal loans and credit cards within the next five years would be extremely difficult or unrealistic.
- The unsecured debt you haven’t paid off represents at least 50% of your gross income (all of the money you earn before taxes and deductions are subtracted). So, let’s say your household’s annual gross income is $60,000. If your unsecured debt exceeds $30,000, you might want to check out debt relief.
“Borrowers with multiple debts or who do not know how to negotiate settlement on their own may consider enlisting the help of a debt settlement firm,” says the National Foundation for Credit Counseling.
Is debt relief a good idea?
Debt relief is a good option when you’re trying to take care of unsecured debt that’s piled up and could be a good alternative to bankruptcy. It might end up being the best (and only) option if you’re struggling to wipe out at least some of your unsecured debt.
Keep in mind that debt relief might not be available in the state where you live. For instance, National Debt Relief is unable to help consumers in Connecticut, Oregon, Vermont and West Virginia.
What does it take to qualify for debt relief?
Requirements differ from one debt relief company to another.
At National Debt Relief, you must have at least $7,500 and be able to make monthly payments into your settlement fund to qualify for our debt relief program.
Debt relief companies also might have other criteria. For example, National Debt Relief can help people experiencing financial hardship “with no quick end in sight.” Examples of financial hardship include a job loss, credit card debt, divorce, spouse’s death or unexpected expenses.
What credit score is needed for debt relief?
Although other debt relief companies may have different criteria, National Debt Relief does not require a minimum credit score in order to participate.
What are the disadvantages of debt relief?
While settling your unpaid debts certainly can put you on the path toward a better financial future, there are drawbacks. These include:
- Forgiven debt is subject to income tax.
- Creditors aren’t obligated to settle.
- Fees of up to 25% of the debt enrolled in a program might be charged if the debt is resolved successfully.
- Delinquencies as a result of participation in a debt settlement program remain on your credit report for seven years and could also negatively impact your credit score.
5 tips for avoiding debt relief scams
It’s easy to fall for a debt relief scam when you’re worried about money that you owe. Here are five things the Better Business Bureau says should raise your suspicions when it comes to debt relief services:
- You’re asked to pay a fee before your debt is settled.
- You’re led to believe a debt relief company is a government program.
- You’re told the debt relief company can make your debt go away.
- You’re promised that your credit score will increase quickly.
- You’re assured that negative information will be removed from your credit report.
If any of these things happen when you’re communicating with a debt relief company, seek help elsewhere.
Are debts forgiven after seven years?
You might think you don’t need a debt relief program or any other help with past-due debt because you believe the debt will simply vanish. Think again.
Debts aren’t forgiven after seven years, as some people mistakenly assume. Rather, federal law says negative information generally can appear on your credit report for seven years. This includes late payments, debts that have gone to collections, accounts that have been charged off by a creditor and Chapter 13 bankruptcy cases. Even though this information normally falls off your credit report after seven years, unpaid debts don’t disappear after seven years.
Beware of student loan forgiveness scams
Private student loans may be included in debt relief programs, while federal student loans are not. If you do have federal student loan debt, you should be on the lookout for scams.
Since the White House announced in 2022 that millions of borrowers could have their federal student loans forgiven, the number of forgiveness scams is on the rise, according to the Oregon Division of Financial Regulation. The state agency warns that in the wake of the White House announcement, scammers “are bombarding borrowers with fraudulent offers for loan forgiveness and refinancing.”
The agency recommends ignoring phone calls, emails, social media messages and other unsolicited contact from people claiming that they can help speed up the forgiveness process or suggesting that you should refinance a federal student loan.
Scammers often ask for upfront or monthly fees in exchange for canceling all of your student loan debt right away.
“There are no fees associated with signing up for student loan forgiveness, so don’t fall for these scams,” says TK Keen, administrator of the Division of Financial Regulation. “Everyone will have the same opportunities, and there are no ways to cut in line and get loans forgiven faster.”
Lane Thompson, who represents the interests of student loan borrowers in Oregon, says that anytime the U.S. Department of Education releases changes in federal student loans, “scammers come out of the woodwork.”
“The advice remains the same: If it seems too good to be true, it likely is,” Thompson says.
That being said, the Department of Education notes that you might be able to get help with student loan debt (at least private student loan debt) from an accredited debt relief company.
“Getting assistance from a private, unaffiliated debt relief company doesn’t necessarily mean you’ll be scammed. But seeking out unverified services is a common way to stumble into a student loan forgiveness scam,” the department points out.
Examples of student loan forgiveness scams
The Department of Education provides these examples of false claims you might come across in a student loan forgiveness scam:
- “Act immediately to qualify for student loan forgiveness before the program is discontinued.”
- “Your student loans may qualify for complete discharge. Enrollments are first come, first served.”
- “Student alerts: Your student loan is flagged for forgiveness pending verification. Call now!”