How Do Debt Solution Companies Work?

Debt solution companies attempt to provide assistance to debtors who fall behind on multiple debt payments and cannot fulfill obligations with their current income. Without a debt solution, the result may be a legal action to seize money or assets from the debtor to make the payment. This is beneficial neither to the lender, which still loses money, nor to the debtor, who suffers severe damage to credit and loses collateral. A debt solution is an attempt to negotiate an alternative form of payment that is more satisfactory, although debtors should be wary of debt solution companies that make claims that seem too good to be true.

Debt Settlement Programs

Debt solution companies offer various debt settlement programs. The goal of these programs usually is to reduce the amount of debt people owe to their creditors. Through a settlement program, debtors can pay off part of their debt and have their lenders forgive the remaining amount. The key to settlement is the negotiation with the lender. Lenders must agree to a specific settlement amount and often require a sizable lump sum in return for forgiving part of the debt and closing the account.

Debt Solution Company Profit

Debt solution companies make their profits through fees they charge customers. The company presumably provides experience and fully developed plans for settling debt in exchanges for payment. Many debt companies ask that debtors transfer their funds into an account overseen by the company. The company also may charge a fee for managing the account and making timely payments to creditors so that debtors do not have to worry about payments themselves.

Debt Solution Scams

Debt solution scams are common, and some organizations try to take advantage of customers by attracting them with unattainable promises and "required" fees. Debtors legally do not have to pay debt settlement companies or relief companies any fees before debt is settled or reduced. Many companies require illegal upfront fees before work is performed. A debtor can seek a debt reduction or settlement plan on his own directly with a lender if a solution company is not a viable option.

DMP

Debt management plans (DMPs) are related to the services debt solution companies offer, but DMPs deal more with debt counseling. Rather than helping you get rid of debts or reduce payments, DMPs try to organize debtor finances to deal with current debt. Lenders may waive fees or reduce interest rates, but the key is creating a workable debt schedule and sticking with it to pay off current debts without incurring more.