Personal finances can be a tricky subject to traverse. Debt is something that impacts several millions of people every year. Debt can severely affect your life in a plethora of ways. It can severely limit your options regarding what you can buy. It can also severely impact other areas in your life like your job or your family. Not only is debt often debilitating but it will also directly affect your overall credit score.
Once your credit score or rating slips down toward 550-649, you’ll be considered poor. If your credit score hits somewhere around 300 to 549, you’ll be listed under ‘very poor’. When that occurs, you’ll be facing several years of difficult finance options. A good way to avoid all this from happening to you is by fixing your credit score. You can achieve that by getting out of debt.
There are many options to pursue when it comes to settling debt however, today, we’ll be looking closer at the concept of Debt Relief. A lot of people are often confused regarding the concept of “debt relief” and a “debt relief company”.
What is Debt Relief?
This can refer to the act wherein part of the overall debt amount is written off or significantly reduced. This is often granted under extreme circumstances like no foreseeable way to pay off your debts within the next five years or so. It is important to remember that child support isn’t even considered for debt relief. As for student debt, it is best to consult with your creditors if you are eligible for it.
What is a Debt Relief Company?
These are establishments that offer credit counseling and possibly debt settlement. They can also be called debt settlement companies as well.
They often step in to provide you with options on how to settle your debts with your creditors. Also, they can offer to be the middleman and do the payment settlement negotiations with your creditors on your behalf.
Warning: Beware of Duplicitous Companies
One of the Federal Trade Commission’s biggest headaches is fraudulent debt relief companies. These companies often promise to negotiate a one-time settlement payment that reduces the principal amount by around 50% to 70%. As amazing that may sound, it’s wholly and completely impossible.
What happens is that clients believe this, do the “one-time settlement payment” then find out that their funds never went to the creditors. In fact, the creditors were never even contacted to begin with. So what happens is instead of being less in debt, it is now compounded by a staggering “service fee” and missing funds.
What could also happen is that they offer to drive down your interest rates following a small fee of somewhere below $300—however, as it turns out you’re actually just paying a “referral fee” so that company can link you to an actual company that can help you. Other companies have been known to subject their clients to opening a new bank account which will be handled by a third party. The client then has to make payments at the “new bargain terms” only to find out later they’ve been missing out payments to their actual creditors.
Such fraudulent companies often target those in dire financial straits and are more susceptible to the promises of a driven down interest rate or having the whole debt written off. One of their favorite marks would be those struggling with student debt. What often happens is that fraudulent companies take payments and “service fees” from clients and simply enroll them in pre-existing and FREE federal programs.
In the worst case scenario, the companies will gain power of attorney over their client’s finances.
While not an outright scam, some of these companies promise to drive down your debt but do not tell you that they plan to do so by filing bankruptcy on your behalf. Bankruptcy will be a permanent stain on your credit record for the next ten years or so. It also severely hampers the speed in which you can recover your credit score.
It is important that you exercise due diligence before you choose to work with a debt relief company. Contact any local consumer protection agency in your area. You can ask them regarding any sort of complain regarding any debt relief firm you might be looking into. You also need to check what regulations your state has regarding such firms. If your state requires certain licenses, make sure that the firm you’re talking to has them.
Warning signs to look out for:
As a precaution when dealing with debt relief or debt settlement services, it is important to keep a sharp eye out for any red flags. Here are a few of them:
- Asking for any fees before they actually help you
- 100% guarantee of driving down your interest rates or principal debt amount
- Asks you to only do business with them and not contact your creditors
- Tells you to stop paying your creditors to make room for negotiation
- When asked about a breakdown of their fees, they are very vague
What are reliable options for debt relief?
While there are not clear cut answers to getting debt relief, it is important to know the proper places where you can get help. You can seek options with the National Foundation for Credit Counseling. Set an appointment and have one of their licensed finance counselors pour over your financial profile. From there, they’ll be able to tell you if you qualify for any debt relief program that’s already running.
You can also check with the Financial Counseling Association of America. They can offer you grounded and well-established avenues that you can pursue. What’s great about them is that they don’t offer to handle things for you (which are what debt relief companies do). Instead, finance counseling will give you a realistic look at what you could possibly get into if you still wish to get a debt relief firm’s services.
Keeping an open eye out is a great way to avoid further disaster to your finances.