Your credit card payments are out of control. You’re 30, 60, or maybe even 180 days late. Creditors are calling, interest is building, fees are mounting, and your stress is through the roof.
Then you see an ad for a company that can seemingly make it all go away—a company that'll finally get you some much-needed relief from your debt. The ad even makes it sound like this is your legal right, that your credit card companies are bullying you. The solution, of course, is their debt relief program.
It’s important to understand that “credit card debt relief” is not an official term used in the finance industry. It’s a marketing term that debt settlement companies use to play to indebted people’s desire for relief. The term can be interchangeable with debt forgiveness, debt settlement, or debt negotiation. What differentiates debt relief programs is that they’re set up by a company that does the work for you.
You may have seen their ads in the mail, on TV, or online. I hear them on the radio (which makes me wince with pain). They promise to lower your debt burden, help you avoid bankruptcy, and hold your hand every step of the way. The offer is enticing.
But as with anything that sounds too good to be true, there are some strings attached. This is what you should know about credit card debt relief programs before you join one. Generally, these programs work in four steps:
1. Instead of making your payments to your credit card companies, you are instructed to send those payments to the debt settlement company to be kept for you in a Federal Deposit Insurance Corp.-insured savings account.
2. Once that account reaches a certain amount, they will start negotiating your debts.
3. Sometime in the future, if the company is successful on your behalf, they contact you for your approval of the negotiated settlement.
4. They pay that settlement amount to close that debt and move on to the next debt.
In the first three steps, your debt relief company will not be making payments on your debts. The primary goal of debt relief programs is to negotiate lower settlements. They will stop making payments to your creditors as their way of achieving that goal, and that will destroy your credit score. They want you to look like a deadbeat customer so your creditors will assume you’re about to file for bankruptcy, in which case they should be ready to take just about anything before you actually file.
Depending on how large your debts are, those steps can take years, and during that time, your credit score continues to plummet.
If you see the word “guarantee” anywhere in a company’s marketing materials, run, don’t walk, for the hills. No one can guarantee any level of forgiveness when it comes to debt. You are—and will continue to be—legally obligated to repay those debts.
Know going in that debt settlement companies do not have a good track record in negotiating down debt. You may have heard stories of success, but every case is different, and stories are often just stories.
Something else: You will be required to pay taxes on any amount forgiven through the settlement process. Contrary to what some commercials may lead you to believe, the government has no debt relief program. However, that amount will be treated as ordinary income with taxes due immediately to both the federal government as well as your state if you live in a state that has an income tax law.
While debt settlement companies that market their services are now banned from collecting fees from consumers before settling or reducing the consumers’ debt, they still don’t work for free. Debt settlement companies will charge you on a percentage basis—usually, a portion of your total debt or of the amount forgiven.
Do It Yourself
You can create your own debt management program and manage it right down to the last dollar of your debt paid in full! I'd be honored to teach you how my husband and I did that. You can find it in detail in my book “Debt-Proof Living,” available on Amazon or wherever fine books are sold. This is the plan my husband and I used to get out of debt—with no settlements, concessions, or forgiveness. And our credit score slowly went up until it was completely restored to good health.Debt Management
A debt management plan, usually offered by a credit union or nonprofit financial organization, is a voluntary program that allows you to pay funds to your credit counseling agency each month. They send those funds directly to your creditors on your behalf—no savings account involved.While debt relief programs can kill your credit score, a debt management plan can actually improve your score throughout the 30-to-60-month program.
Debt Consolidation
Most debt relief programs won’t accept clients with less than $10,000 in debt. If you fall below this figure, a personal loan or balance transfer credit card may be good options for you.Many types of credit card consolidation can lower your interest rate—sometimes down to zero percent for up to 18 months—and help you avoid fees. But you have to be ready to commit to paying off your debt within the terms of the loan or card.
Whatever way you choose to pay off your credit card debt, it pays to be informed about the risks and rewards associated with the different methods. Do your own due diligence, and you'll avoid being scammed on your journey to financial freedom.
