Legitimate Debt Relief Programs

Man doing calculations with table full of overdue bills
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Some Americans struggle to get out of debt and, in the process, fall prey to debt relief companies that promise the consumer help, but accomplish little other than self-enrichment. But while some of the businesses are worthy of a bad reputation, other debt relief agencies help the consumer develop a plan that may include a manageable interest rate and specific instructions to pay the debt owed. Debt relief organizations include debt settlement companies, debt negotiation companies, debt management companies and debt consolidation companies.

Debt Settlement Companies

Debt settlement eases a debtor's financial burden by reducing the total debt amount he owes. The debt settlement company negotiates with unsecured creditors to reduce the total amount due in order to better ensure the consumer can pay scheduled payments regularly. Depending on the consumer's financial situation, a lender might agree to reduce a debtor's balance in exchange for the debtor's agreement to make a lump sum payment. Under a debt settlement agreement, the debtor deposits an agreed-to dollar amount to a bank account from which the debt settlement company extracts its fees and makes payments to creditors. Debt settlement fees may include a flat fee based on the money the debtor saves by debt settlement, as well as a percentage of the debtor's original outstanding debt.

Debt Negotiation Companies

A debtor, or a debt negotiation company that represents him, can negotiate with creditors for a reduction in the monthly payment amount on a temporary or permanent basis. But the Federal Trade Commission warns debtors that although debt negotiators may charge high fees, they may not produce satisfactory results. For example, a debt negotiation company may charge a fee to open a file, a monthly service fee and a percentage of the amount of money it saves you. Also, debtors should be aware that creditors may not accept a lower payment for a debt, but rather sue the consumer for debt nonpayment.

Debt Management Companies

A debt management company works with your creditors to create a repayment plan to settle your unsecured debts. Under the debt management plan, your interest rate may be reduced and your creditor may waive some fees to facilitate your repayment of your debt. To implement the plan, the debtor establishes a bank account, and deposits money to the account each month. In turn, the debt management company pays creditors using the funds the debtor deposits to the account. In exchange for the service it provides, the debt management company may charge a relatively high fee. The debit management firm may also act as a credit counseling agency by educating the consumer about cash management and the appropriate use of credit and debt.

Debt Consolidation Companies

Debt consolidation improves a consumer's debt load by reducing the number of his outstanding debts. With this approach, a debtor consolidates his debts using a consolidation loan that pays off the existing individual loans. As a result, the consumer will have one loan, one interest rate and one monthly payment that he pays to one creditor, rather than many. The interest rate and monthly payment amount may or may not be less than that of the original credit agreements. But a consolidation loan's payback period may be greater than that of the original credit agreements. Consequently, over the long term, the debtor might pay more interest even though his monthly payment might be less. In addition, creditors may require the debtor to secure the loan with assets, such as his home or a retirement account.