About Debt Reduction Services

Your debt loads decrease the moment you start spending less than you earn and commit the additional funds to paying down your credit cards. You may experience frustration and withdrawal as you eliminate the perks you were enjoying by running up your credit cards, but ultimately, you gain control over your finances. There are ways to make a plan for yourself or to enlist the aid of services to assist you in your financial goals.

Credit Counseling

A credit counseling agency negotiates lower interest rates on credit accounts that you enroll in the program. The agency collects a single payment from you each month and disburses it out to the creditors. The agency also provides a series of educational tools and workshops to help you better manage your finances. Agencies usually don't assess fees for service. Enrolling in a credit counseling program doesn't hurt your credit score, but the creditors you enroll may close your account. You also may be unable to obtain new credit accounts while enrolled in the counseling program. The lower rates and inability to take on new debt quickly aids you in reducing your outstanding debt.

Debt Consolidation

A bank or specialty lender may offer a debt consolidation loan program to help you reduce your debt. In this approach, you take out a new loan at a lower interest rate to pay off higher-rate credit card balances. The lender may charge origination fees or administrative fees as part of the loan. The lower rate and single monthly payment often proves effective at lowering rates. A risk, however, is that you'll reload your paid-off credit cards with new balances and then have two significant piles of debt.

Debt Settlement

Debt reduction services often suggest that they can reduce your debt by 30 to 70 percent. These firms work on your behalf to reach a settlement agreement with your creditors. These groups typically charge contingency fees expressed as a percentage of the amount of money their settlement efforts saved you; there may also be administrative or ongoing program fees. Each month you send in an agreed-upon amount to the settlement firm to build up your escrow until the amount is high enough to offer a settlement on one or more of your accounts. You often end up paying less overall, even with the fees, but settlements reflect negatively on your credit report --- they remain for up to seven years --- and you may have additional income tax liability from canceled debt.

Bankruptcy

Often a last resort, firms and attorneys can help you file bankruptcy. You submit a plan of repayment of debts in a bankruptcy court for review and approval by your creditors and the court judge. There are legal fees associated with filing bankruptcy, and the end result is significant, long-term damage to your credit report that may make it difficult to obtain a loan of any form over the next 10 years --- the length of time the bankruptcy remains on your report. The plan you submit proposes a realistic repayment plan based on your assets and income; the total amount to pay can be much less than the total amount currently owed. Bankruptcy is never a process that wipes the slate clean, and there are other requirements, such as enrolling in financial management courses.