Debt Reduction Programs

Debt reduction programs allow consumers to avoid bankruptcy and credit counseling services and still manage to pay down their unsecured debts. Each debt relief or debt reduction company is somewhat different in its practices and methods. In short, the consumer will make one payment per month to the company offering a debt reduction program. The company pays off the debt for the consumer after working with lenders to reduce the debt amount, interest rates and fees.

Program Approval

The first step in using debt reduction is qualifying for it. The consultants from the company must work with the consumer to determine what debt he has. They must develop a reasonable monthly payment based on the amount owed, the state's requirements, and account activity. The consultants must determine if the consumer has enough income to pay down his debt. In some cases, where employment or income is limited, debt reduction programs may not work and bankruptcy may be suggested.

Settlement Methods

Consumers pay a monthly fee to the debt reduction program. The program saves these funds in a servicing center. The funds are not disbursed immediately to creditors. Rather, the funds accumulate over a period of time. Once these funds reach a high enough amount, the debt reduction company then approaches the consumer's creditor and suggests a settlement. This may be as little as 40 to 60 percent of what is actually owed on the account.

Elimination of Debt

The debt consultants negotiate the debt down for the consumer so as to offer a lump sum settlement offer. Each debt is settled in this way. Once the creditor agrees to the settlement, the debt is then labeled as settled or paid on the consumer's credit report. No additional funds are owed to the creditor after that point. In some cases, the debt reduction company may set up a payment plan to pay off the creditor within three to four months.

Fees

Debt reduction companies do require their clients to pay a fee for the service they provide. This fee may be a flat fee paid monthly to the company or a percentage of the debt they settle. It is critical for the consumer to obtain all costs including fees to set up and manage the reduction program ahead of time. Most companies require a contract or agreement to be signed. Ensure that all details of the costs are outlined there.

Downsides

There are several downsides to using debt reduction programs. It will have a negative effect on credit scores and ratings, which will remain on the client's credit report for up to seven years. This "black mark" has less of an effect than filing bankruptcy, however. In addition, during the course of the program, creditors may contact the consumer to request payment. They may also file a lawsuit against the individual for failure to make payment. This does not happen often, since creditors realize this is the best option available for getting their money back.