Consumers borrow money for many reasons, from funding a major purchase such as a home, car or education, to smaller purchases such as buying clothing or going out to eat. Borrowing can be beneficial when done wisely, but excessive borrowing can lead to crushing debt. Debt relief describes any process that reduces a borrower's debts, but it often refers to debt management programs or debt settlement programs. Under these types of programs, a credit counseling service or private company works on behalf of the borrower to reduce debts owed.
The advantages of debt relief programs are that they offer professional financial assistance and can help consumers use money management strategies to reduce their debt. The disadvantages are that these programs do not guarantee results and sometimes use misleading advertisements to lure consumers.
Debt Reduction and Management
The primary advantage of debt relief in any form is the potential to reduce the money you owe. With debt management programs (DMPs), a credit counselor works with creditors to create a debt repayment schedule that often offers lower interest rates or reduced fees. Debt settlement companies negotiate with creditors on your behalf in an attempt to reduce the amount of debt you owe. A reduction of the total owed or interest rates can lift the burden of high levels of debt.
Professional Financial Help
Another advantage of debt relief programs is that they involve getting help from financial professionals. Individual consumers are often unaware of all the options available to them and how to work with creditors to overcome debt. The United States Federal Trade Commission recommends you consider seeking help from a credit counselor if you have trouble budgeting and controlling your debt on your own. A counselor can advise on the best course of action, such as a DMP, debt settlement or bankruptcy.
Results Not Guaranteed
The primary drawback of debt relief is that there is no guarantee your debt will be reduced. The FTC warns that many debt settlement programs claim that they can reduce debts by as much as 70 percent, but lenders have no obligation to negotiate debts. In addition, if you stop making credit card payments because you assume a debt settlement will come through, you may incur additional fees and end up adding to your debt.
The debt relief industry is prone to advertisements that can mislead consumers. The FTC states that consumers should be wary of any debt relief organization that charges fees before it reduces your debts, pressures you to make payments, guarantees debt reduction, guarantees that they can "repair" your credit or tries to enroll you in a DMP without thoroughly studying your finances and teaching you budgeting and debt management skills. Some companies offering debt relief may actually be offering bankruptcy. Thoroughly research debt relief organizations so you understand what they are offering.
- Federal Trade Commission: Fact for Consumers: Knee Deep in Debt
- Federal Trade Commission: FTC Consumer Alert: Advertisements Promising Debt Relief May Be Offering Bankruptcy
- Federal Trade Commission: Credit Repair Scams
- Federal Trade Commission: Choosing a Credit Counselor
- Federal Trade Commission: Settling Credit Card Debt
- Board of Governors of the Federal Reserve System. "Consumer Credit - G.19." Accessed May 26, 2020.
- Better Business Bureau. "New Era Debt Solutions." Accessed June 1, 2020.
- Federal Trade Commission. "Settling Credit Card Debt." Accessed May 27, 2020.
- NFCC. "Top Creditors Responses to COVID-19, Coronavirus Pandemic." Accessed May 27, 2020.
- myFICO.com. "What's In My FICO Scores?" Accessed May 27, 2020.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.