Do Debt Relief Agencies Work?

If you are drowning in debt, online offers of consolidation and management programs can seem like a mirage in the desert. However, only reputable debt relief agencies provide a valuable service to consumers in need of assistance who wish to avoid bankruptcy. They all claim to be legitimate; the trick is finding the organizations that are telling the truth.

How Debt Management Relief Works

First, you need to contact a reputable agency and provide the representative with your personal background and creditor information, including account numbers and balances. The agent then contacts the creditors and negotiates a lower interest rate, payment or both. In exchange, the credit line is closed. Payments are made on a monthly basis, and the debt typically is eliminated within five years. You may combine many loans into one payment, but you must already be behind or about to fall behind on your payments to qualify. Home loans are not eligible for this program.

Management vs. Settlement

Debt relief agencies use management and settlement solutions, but do not provide loans. If you do not have the means to pay on a monthly basis, settlement may be an option. However, you must be willing to satisfy the settlement, usually about 40 percent of the balance, in cash at the end of the waiting period. This usually takes about six months. You must also be willing to tolerate many calls from the collections department.

Best Debt Relief Agency

Contact the National Foundation for Credit Counseling. This nonprofit agency is "the nation's largest and longest serving" organization devoted to helping consumers get out of debt. The agent will give you a free consultation and help you determine which path toward debt relief works best for you. The NFCC does not provide loans, but they can assist you with management or settlement options. The services aren't free, but they are legitimate and effective.

Risks

Don't be fooled by a scam debt relief agency that wants you to pay high fees up front. Also, be advised that it's illegal to establish a new taxpayer identification number, or EIN, for the purposes of obtaining a "new" or "clean" credit report. It also is illegal to hire someone to convince the creditor that you don't owe the debt.

Also, be advised that both management and settlement options can negatively affect your credit. A lender may report to credit bureaus that you've entered a debt counseling program, and a settlement will show as "settled' instead of "paid in full." However, late payments cause the most harm to your credit, and you may have those already. In that case, debt relief may be just what you need.