What Is National Debt Relief?

The commercials for national debt relief make some very appealing claims. "President Obama recently signed legislation that will extend relief to main street," one advertisement states with authority. "If you are a consumer struggling with $10,000 worth of credit card debt, you may qualify for the national debt relief program. We may be able to reduce your debt by up to 50 percent. Call us now for a free consultation."



For many consumers struggling with credit card debt, a national debt relief program sounds like welcome news. But the fact is, there are for-profit and nonprofit organizations competing for your business, and results may vary.

What National Debt Relief Promises

According to the National Debt Resolution website, national debt relief can "reduce your balances up to 60 percent," let citizens "avoid creditor harassment and let someone else do the work" and "help you find debt relief in just 12 to 36 months."

National debt relief is represented as a government-backed program that is federally sponsored for the benefit of the American consumer. National debt relief firms also promise that the process will either improve your credit or have no negative effect on your credit. Consumers are promised amazing results with no pain.

In reality, "national debt relief" is really just a new name for a debt settlement program, which come in nonprofit or for-profit varieties.

What National Debt Relief Really Is

National debt relief is actually just a new way for debt settlement companies to market themselves. Debt settlement has been around for decades, but in the midst of the most recent recession of 2006 and after, debt settlement companies are representing their programs to sound like legitimate federally mandated programs.

Debt settlement is actually a process where your creditors agree to accept a payment of less than the original amount owed on a debt. In many cases, the debt is already in collections.

Debt settlement companies agree to collect and hold your payments for you in an escrow account while negotiating with your creditors. Settlement firms then negotiate with your creditors to reduce the balance on your debt. Once the creditor has agreed to accept a settlement amount, the settlement firm will pay your creditor from the funds in your account.

How Settlement Works

Usually, citizens are contacted by a representative from a debt settlement company. This individual walks you through the benefits of settlement. You are told that the company will get the creditors to stop calling, the balance of your debt will be negotiated down and your credit will be improved.

You accept the terms of the program and return your paperwork. Your debt is "enrolled" into the program and you begin to make payments. Your payments are placed in an escrow account to accumulate while the settlement company negotiates with your creditors.

When there is enough money in your account to satisfy a balance of one of your creditors, the settlement company contacts that creditor to negotiate acceptance of less than face amount to satisfy your debt. If the creditor agrees to the terms the settlement company proposes, the money is paid to satisfy that account.

Usually, settlement companies start with the debt with the lowest balance to show some progress. The process is then repeated with the account with the next lowest balance.

What's the Catch?

Though the settlement process can seem pretty straightforward, there are many pitfalls in the process for consumers. When it comes to debt settlement, the devil is in the details.

Many times, settlement companies will only work with you if your debt is $10,000 or more. And while debt settlement firms promise to reduce your balance by up to 60 percent, many companies fail to mention how much you are ultimately going to pay in fees.

Typically, many debt settlement companies will take the first three or four monthly payments to cover the program's fees. This means you can pay into a settlement program for up to a year sometimes with absolutely none of the money being applied to your debt. Some settlement companies collect a fee upfront, a monthly fee, as well as a fee once the account is settled.

Settlement companies can only work with unsecured debt since there is no collateral to repossess when you stop making your payments. There are some less-than-credible settlement companies that will not tell you this upfront.

Another pitfall is that many settlement companies will counsel you to stop paying on credit cards you still have active. The reason is because many original creditors will not settle a debt with a consumer.

On its Think Debt Relief website, Amerifree Financial claims, "Unlike a bankruptcy, our debt settlement program will NOT show up on your credit report." To settle, however, a debt typically has to be held by a third-party debt collector who usually pays anywhere from 7 to 14 cents on the dollar to acquire the debt. When you stop paying your current accounts the negative effects on your credit can be significant. Settlement programs only make sense if the debts being enrolled are already in collections.

Many settlement programs take longer than you anticipate. If you are having trouble paying your bills on time each month, it can be difficult to stay current with a settlement program. The less-than-honorable settlement companies end up keeping any payments received, even if you drop out before completing the program.

A quick visit to the websites of settlement companies such as Freedom Debt Relief, Freedom Financial Network, National Debt Assistance and National Debt Relief reveals the use of the terms "up to" and "could" when referring to how much you could save in a debt settlement program. The fact is, no matter what you are promised on the phone by a representative from these companies, how much you will save in a debt settlement program isn't guaranteed.

As a consumer, perhaps the greatest thing to be aware of is that you can usually settle your own accounts for far less than having a settlement company settle for you.

Debt Management and DIY Settlement

If you are struggling with credit card debt and the accounts are current, you may be better served working with a legitimate debt management program (see Resources for one example). These programs will negotiate with your creditors to lower your interest rate.

A DMP doesn't reduce your total amount of debt. Instead, by obtaining lower interest rates for you, DMP programs help you pay your outstanding debt off quicker than you could by yourself, since a greater portion of your debt goes to principle instead of to interest. You will pay more of the debt back in a DMP, but your accounts are kept current instead of lapsing to collections.

To settle with a collections account, acquire the mailing address of the creditor listed on your credit report. If the debt is still within the statute of limitations, write a letter offering to pay the collections agency a percentage of the debt in exchange for that account being removed from your credit report.

If the debt collector agrees to your terms, pay the agreed upon amount with a money order.