Debt relief (also known as debt settlement) has had a bad reputation for many years, and for good reason. About 10 years ago, debt relief companies would charge large up front fees and never actually do the hard work of settling debt. Thankfully, the Dodd-Frank Act was signed in July 2010 to help protect consumers from unfair and deceptive practices by debt relief companies. Additionally, in 2009, the FTC proposed amending the TSR to prohibit the collection or charge of fees before services are rendered by debt relief services because the practice was considered abusive.
Although there have been many improvements to the debt relief industry, there are still debt relief players that have glaring red flags. How do you know if debt settlement is right for you? If it is, how can you choose a reputable company to work with?
1) The Basics of a Debt Relief Company
A debt relief company works with you and your creditor(s) to negotiate a lower payment balance and guarantees that the creditor receives that sum in a timely manner. Debt relief is really for those who cannot continue to afford his/her debt in the current state. It is not for someone who is trying to evade paying his/her debt.
2) Is the company I am researching a legitimate debt relief company?
There are legitimate debt relief companies our there, but let’s go through the process of what a legitimate debt relief company looks like.
Be sure to perform a thorough review of any Debt Settlement company you are considering working with. Reading customer reviews from unbiased sites that will help you determine who’s legitimate and who’s not. See if you can schedule a free consultation with a representative. As you get to know some different organizations, here are some questions you should ask before joining forces:
- What are the Pros & Cons’ of Debt Settlement?
- What is an Accurate Estimate of my Potential Savings after Fees?
- How do you Charge for Your Services?
- Will my Credit Score be Affected?
- What is the Likelihood of Being Sued by my Creditors?
- Do you Have a Document Containing Terms of Service?
- What can I Read to Better Understand my Financial Situation?
To aid in your research, let’s go through a list of “Green Flags” and “Red Flags”.
3) Green Flags
Now that you have asked some of the hard questions, it’s important to find a company that has your best interest as their first priority. You’ll potentially be working with a Debt Settlement company for months and dealing with thousands of dollars so it’s vital to team up with someone you can trust. Here are some key characteristics of a good Debt Settlement company that you can check for:
1) Honesty About the Pros & Cons of Debt Settlement
There’s no easy fix when it comes to Debt Relief. While working with an experienced company is a good step toward securing a lower balance on your debt, there are obstacles that have to be overcome and risks that have to be taken. There are definitely pros to pursuing debt relief as you can save money, get on a specific payment plan for all your debts, and get relief from collection calls. There are also cons such as the credit score impact, potential tax implications and a chance of lawsuit.
2) Thorough Analysis of Your Debt & Credit Score
One of the risks of using Debt Settlement tactics is the potentially damaging effects it may have on your credit score. A good Debt Settlement company will take note of your current credit score, your credit history, and the amount/type of debt you are hoping to settle. Based on this information, they should be able to give you an idea of how your credit score will be impacted if you choose to move forward.
3) Provides a Free Estimate of Costs & Savings
It’s important to note that any initial consultations or analysis of your financial situation should not cost you anything. Being able to sit down or have a detailed phone conversation with a Debt Settlement representative is crucial to having a good working relationship with them. Look for a company who is willing to thoroughly discuss your options and provide accurate estimates – free of charge.
4) Reasonable Fees (We recommend less than 20% of enrolled debt)
Every Debt Settlement company will have slight differences in how they charge for their services. While some companies will charge a flat fee for their services, most will ask you to pay a percentage either of the amount you enrolled when working with them, or the larger amount you are trying to reduce by enrolling in their program. How much you should have to pay? We recommend a reasonable amount would be 20% or less of your enrolled debt. Make sure you find a company that charges fairly for their services.
5) Educates You as the Consumer
Before jumping into a solution like Debt Settlement, it’s important to do your homework. Reading reviews, comparing prices, learning about different tactics, can all help you make an informed decision. What’s even better, is working with a company who wants to help educate you, and try to give you unbiased information. Look for individuals who love to teach and are willing to discuss multiple options to help you find the best fit for your situation.
6) Willing to Recommend Other Options & Services
After an in-depth meeting and lots of questions, you may find that the company you’ve been considering just isn’t right for you. The ultimate test of a reputable Debt Settlement company is there willingness to recommend other options or services that don’t earn them any money but better help your situation. Honesty in this area says a lot about a company’s credibility.
4) Red Flags
While you are in the process of analyzing a Debt Settlement company, it’s also important to be on the lookout for misleading claims and potentially dangerous situations. Despite regulations and accreditation programs, scammers still abound. If you come across any of these situations while interviewing with a Debt Settlement company, beware!
1) Doesn’t do a full analysis of your options
There are alternatives to debt relief. A debt relief company should review your financial situation and provide the best solution. Too often the goal is to pigeon hole you into debt relief when a better debt relief (or no debt relief solution) is right for an individual because the salesperson’s commission depends on it. This is wrong. There is a free comparison tool (it states bankruptcy, but it allows you to compare all debt relief options) that helps determines the plan payments and compare pros and cons to the different actions.
What is the most egregious case of this that we see? Not doing this full analysis for someone who is currently NOT behind on his or her payments. It can be less detrimental for someone to enroll in debt relief when they are already behind on their payments, but it’s very important to double check that debt settlement is right for you when you are not behind.
2) Has Amazing Review Only On Biased Review Sites
We see this over and over again that consumers are directed to paid review websites that point people to debt relief companies, with the top ranking going to the one that produces the most money for the website.
How do you know if a website is biased? The trick is to take a closer look at the destination URL? If the website has a great deal of language after the initial URL (/aff/ffd-3/pid=2342Adfsd@#$23&dkd_campaign_ id=23…) than it is probably a paid link. Paid referrals are by no means wrong, but we do not believe that the amount that you pay in total for customers determines how well you will actually take care eof those customers.
What we believe are more biased:
What we believe are more unbiased:
Not surprisingly, many of the review sites such as Yelp don’t have a financial incentive to have a good review for a debt relief service. So, you can type “”debt relief company you are researching” Yelp”, and you would be able to see the reviews for that debt relief company. Please note that some of the smaller debt relief companies may not have reviews on some of these sites.
3) Pushy Sales Tactics
Choosing to go up against a bank or credit card company is a big decision. You need someone guiding you who is helpful, honest and informative. You do not need someone who is pushing you to make a decision quickly, or is primarily concerned about sales quotas. Find a business that wants to educate and serve you and avoid businesses that want you to commit immediately with little/no information.
4) Upfront Fees
If a debt settlement company requests payments before any results are produced, they are breaking the law. A stipulation was put into place a few years ago requiring that you as the client must agree to a proposal and ratify that agreement by making an initial payment to the creditor before any payment can be levied by the Debt Settlement company. If you have paid for debt settlement services that were never provided, you should report the situation.
5) Promotes Debt Relief as a Debt Consolidation Loan
There are too many companies that pitch a debt consolidation loan, only to push you down the debt settlement route. These companies often provide ambiguous mailers that make you believe that you are applying for a debt consolidation loan, only to have debt settlement as the option on the other side. Beware of companies such as these as we consider these as bad business tactics.
6) Only Mentions the Positive Outcomes
Good salesmen are great at promoting their service and focussing on the positive outcomes of working with their business. However, honesty about the pros and cons of Debt Settlement is a must. If the company you are considering provides no information about the possibility of creditors suing, damage to your credit score, or the potential taxes you’ll have to pay if you are tax solvent as defined by IRS, you should probably look for a better teammate.
7) Unclear About the Amount of Potential Savings
A good Debt Settlement organization should have plenty of experience with different types of debt situations as well as the habits of different creditors. It’s important for you to have a good understanding of how much money you will likely be paying and how much money you are likely to save. If a business representative can’t give you a clear estimate on either of these statistics, you should look for someone who has more experience.
8) Enrollment Despite a High Likelihood of Lawsuit
When you engage in a debt settlement plan, there is some risk of being sued for defaulting on your payments. Your likelihood of being sued is tied to how much debt balance you are carrying, if you are behind on your payments, the past actions of the creditor you are dealing with, and several other important factors. A good Debt Settlement company will work to mitigate those risks by communicating with your creditors. They should also know whether the risk is too high to even try. Make sure the company is willing to talk openly about your risks and beware if they push enrollment regardless of the threats.
Debt relief can be a great avenue to receive the debt relief that you need, but finding a great debt relief company can be quite the hunt. Ask plenty of questions and be on the lookout for positive and negative characteristics in the company. Once you are able to settle on a reputable, helpful and skilled organization, you should have an excellent chance of reducing your debt and saving money.
It’s also important to note that there are alternatives to debt settlement. Eliminating all of your debt may seem impossible, but there are several proven methods for bringing your debt situation to a healthy resolution. Solutions range from creating a debt-destroying budget, to Debt Management to filing for Bankruptcy. The severity of your debt situation will determine which method you’ll want to pursue.
If you are wondering if the debt relief company you are looking at is legitimate, feel free to reach out to me if you have any questions. You may also be interested to reach out to your state’s consumer protection office or your state’s attorney general to see if there are any issues with the company you are analyzing.
What is Ascend?
Ascend is a mission based comparison debt relief provider. We offer free advice to folks who are considering such forms of debt relief as bankruptcy, debt settlement, debt management and doing it yourself. We built a debt relief comparison calculator (below) to help people understand and compare all the debt relief options such as debt management, debt settlement, debt payoff planning, Chapter 7 and Chapter 13 bankruptcy.