Is Your Debt Relief Company Legit?

Debt is a big deal for millions of us. As living costs escalate, it’s easier to get into debt and harder to climb out. So a lot of Americans are looking for help in managing it. 

You may have heard that debt relief companies can offer lower payments and help you get rid of your debt for less than the full amount you owe. It might sound too good to be true. So is debt relief legit? We’ll help you answer that question.

What Is a Debt Relief Company?

The term debt relief can mean different things. For Freedom Debt Relief specifically, it means debt settlement (also known as debt negotiation or debt resolution). Our debt settlement program can be an effective alternative to other debt solutions like:

• Debt snowball or avalanche

• Debt management plan

• Debt consolidation

• Bankruptcy

Once a client enrolls in our debt relief program, we negotiate directly with their creditors to reduce their debt as much as possible. Debt settlement is an appropriate strategy for unsecured (primarily credit card) debts. For many people, it takes two to four years to complete a debt relief program. Professional debt relief is an option for someone who has at least $7,500 in unsecured debt.

Whether you settle debts yourself or work with a professional debt settlement company, you should expect a negative impact on your credit score, calls by collection agencies, and possible legal action. Every debt solution has its pros and cons, and it’s important to be transparent about both.

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How Does Debt Relief Work?

If you're struggling with your debts, it’s worthwhile to explore whether professional debt relief is right for you. Part of that means understanding the process.

Here's how debt relief works:

• You have a consultation with a debt relief company to discuss your financial situation and goals, and you're provided some options.

• If you decide to move forward with a debt relief program, the debt settlement company will open a dedicated account on your behalf. You own it and control it. You’ll make an affordable monthly deposit into this count. The idea is to save up money to offer your creditors.

• Expert negotiators work with your creditors, to hopefully arrive at a settlement agreement.

• At Freedom Debt Relief, once we reach an agreement with your creditor, we present it to you for your review and approval.

• If you approve the agreement, the first payment (sometimes the only payment) to your creditor is made from your dedicated account

• Once all of those things have happened, the debt settlement company takes its fee from the same account.

Once your debt is settled, you can move forward without the burden of those monthly payments. The process generally takes two to four years, though the exact timing depends on your specific circumstances. Most clients get their first debt resolved within a few months after they enroll. 

What Do Debt Relief Companies Cost?

Debt relief isn't a one-size-fits-all solution, so the cost can vary. Generally speaking, debt relief companies charge a fee of 15% to 25% of the debt you enroll to be settled.

Watch out for upfront fees. It’s against the law to charge settlement fees upfront. A legitimate debt relief company only charges you after they've negotiated your debt for you and reached a settlement agreement, and at least one payment toward the agreement has been made.

To give you an idea of what debt relief might cost, let's say you turn to a debt relief company to have $30,000 in debt settled, and the fee is 25%. This means the company's fee is $7,500. If your expert negotiator were to reach an agreement with your creditor to resolve the debt for $12,000, you’d pay $12,000 plus $7,500, for a total of $19,500.

No debt settlement company can guarantee any specific amount of debt forgiveness. Your creditors don’t have to settle your debt at all. The range of discount could be anywhere from zero to 90%. Whether your creditor will settle and for how much depends on:

• The amount of the debt

• The status of the debt

• The creditor

• Your financial situation

• The outcome of the negotiation process

Note on fees: As mentioned earlier, with a debt relief program, you deposit funds into a dedicated account that’s used to pay off your creditors. This account will be held at an FDIC insured bank or NCUA insured credit union. The financial institution might charge a set up fee and/or a monthly maintenance fee for the account. These fees aren’t charged by Freedom Debt Relief. 

Debt settlement isn't your only option for debt relief. Debt consolidation and bankruptcy are other potential solutions if your debt has become unmanageable.

Tax Implications of Debt Settlement

Settled debt may have tax consequences.

Generally speaking, forgiven debt is treated as taxable income. If someone forgives $1,000 of debt, the IRS considers it to be the same as handing you $1,000 to repay the debt on your own. That could result in a tax bill that diminishes the savings you enjoy from having your debt settled.

When a creditor agrees to settle your debt for an amount that's less than what you owe, they’ll issue you a Form 1099-C (Cancellation of Debt). That form shows the date of the cancellation and the amount of debt that’s been forgiven. You have to report that cancellation on your tax return for the year in which your debt is settled.

For example, let's say you owe a creditor $25,000, but they agree to settle your debt for $15,000. The remaining $10,000 is reported on Form 1099-C, and that amount is added to your taxable income. How much that costs you depends on your tax bracket, among other factors.

It's a good idea to consult a tax professional for advice before you agree to a debt settlement. They can help you prepare for the tax bill that might arrive. 

Pro tip: The IRS won’t make you pay federal income tax on forgiven debt if you’re insolvent when you settle the debt. That means the total amount of debt you have is more than the value of the things you own.

Read more: Debt Settlement Taxes

Not All Debt Relief Companies Have Your Best Interests at Heart

Before you entrust your financial future to a debt relief company, it’s extremely important to be confident you’re working with a credible provider. In 2010, after a boom in the industry, some debt relief companies weren't acting in their clients’ best interests. The Federal Trade Commission (FTC) stepped in to implement stronger regulations to protect debt relief clients. Also during this time, the American Association for Debt Resolution (AADR) formed as a trade association to ensure compliance and transparency.

As a result of these changes, many less-credible debt relief companies left the industry. But there are still some bad apples. Protect yourself—research companies before hiring a debt settlement provider. If you have questions, any company should be open and happy to give you the answers you seek. 

If a company avoids answering your questions, consider that your first red flag that the debt relief company may not be legit.

Is Your Debt Relief Company Legit?

A debt relief company that’s legit may be worth working with for many reasons. It’s important to find the right one. In the course of your research, beware of the following red flags. Any of these may be a sign of a company that does not have your best interests at heart. 

Watch out for companies that:

• Charge fees before settling debt. FTC rules prohibit a debt relief company from collecting any fees until after it has negotiated a settlement and the customer has accepted it. 

• Promise to settle all of your debts for a single reduction. The debt settlement process involves negotiating each debt with each creditor. Depending on the amount, the creditor, and the individual situation, each settlement may be different.

• Tout a government program to erase credit card debt. No such programs exist.

• Guarantee they can make all your debt go away. As with many things in life, there are no guarantees. A debt relief company that’s legit has the motivation to work hard and get the best results possible for clients. In talking with a company, ask about the results obtained for previous clients.

• Claim they can stop all debt collection calls and lawsuits. They can’t. In a debt settlement program, most clients let their credit accounts go past-due. That allows the client to set aside money for making settlement offers. It also sends a distress signal to the creditor. Creditors may respond by calling frequently, or even threatening (or filing) lawsuits. Legitimate debt relief companies guide you through the process and help you with any issues or concerns.

• Tell you to stop communicating with creditors. Stopping all communications may not always be in your best interest. A debt relief company that’s legit leaves that decision to you, offering tools and advice on asking creditors to communicate only with the debt relief company.

• Have vague (or no) answers to your questions. Reputable debt settlement businesses are upfront about fees, counsel you on the possible challenges of the process, and tell you how long the process might take.

• Call you repeatedly to pressure you into moving forward. The decision to work with a debt relief company is a big one. Take the time to do your research so you’re comfortable.

• Have a poor Better Business Bureau rating. If a debt relief company has many complaints on file, take that to heart. 

• Ask for access to your bank and credit card accounts. Never share login or password information with anyone.

At Freedom Debt Relief, we want you to get all the answers you need to tackle your debt. We’re proud of the work we do, and we want clients to be confident before they commit to the process. We’ll answer any questions you have, any time.

Pros and Cons of Working with a Debt Relief Company

If you're thinking of working with a debt relief company, it's important to understand the pros and cons. 

Pros of working with a debt relief company:

• Potential for significant debt reduction. A debt relief company may be able to settle your debt for considerably less than the amount you owe.

• One monthly payment. Juggling multiple debt payments can be stressful. A debt relief program could leave you with just one monthly payment.

• Professional negotiation. Debt relief companies are in the business of negotiating with creditors. They use tactics that may lead to a more favorable outcome than trying to settle debt on your own.

• A quicker path to being debt-free. A debt relief program may help you get rid of your debt sooner than chipping away by making minimum payments.  

Cons of working with a debt relief company:

• Damage to your credit score. You will probably stop making payments to your creditors (if you haven’t already) while a debt relief company negotiates for you. That could result in late payments on your credit report, lowering your credit score. Settled debt is also noted on your credit reports.

• Tax implications. If a debt relief company settles your debt, the settled portion you don't have to pay could be taxable. 

• Debt relief fees. Debt relief companies charge fees for their services. 

• Not all debts qualify. Certain debts don’t qualify for a debt relief program. Secured debts like mortgages and auto loans generally cannot be settled by a debt relief program. The same applies to student loans, particularly federal loans. In some cases, private student loans may be eligible for settlement.

• No guarantees. While a good debt relief company may have strategies it can use to negotiate your debts, ultimately, it's up to your creditors to decide whether to settle with you. 

• Not all debt relief companies are legit. There are some dishonest players in the debt relief industry. Not all debt relief companies act in your best interests, so it's important to do your research before choosing one.

Explore Your Debt Relief Options and Make the Right Choice

While using a debt relief company to settle your debt may provide the results you're hoping for, it's not your only option. Here are some other options that may be viable for you.

Pay off your debt

Most debt solutions involve making payments for a period of time. Review your debts and your income to figure out whether you could fully pay off your debt yourself, using a debt snowball or debt avalanche. 

The cost to DIY your debt payoff is nothing but the debt.

Negotiate a debt settlement on your own

You don't have to use a professional debt relief company to negotiate a debt settlement. You can reach out to your creditors and settle your debts on your own. It takes grit and commitment. Creditors want to be repaid, so don’t expect a settlement offer you like on the first phone call. But if you’re willing to advocate for yourself, you could have some success.

The cost to DIY your debt settlement is the negotiated amount for each debt, which could include fees charged by the creditor.

Debt management plans

A debt management plan (DMP) is a repayment plan offered by a not-for-profit credit counseling agency. It's different from debt settlement in that the goal is not to reduce the amount of debt you owe. Rather, it's to have you pay off your debt in full, but in a way you can afford. 

A DMP may be harder to follow than a debt settlement plan because you don’t get a break on the total amount you owe. The payment is high because the program is designed to clear your debts in three to five years. 

Since a DMP means repaying your debts in full, there’s no tax bill. 

The cost for a DMP is your full debt, plus a modest monthly fee, typically under $50.

Debt consolidation loans

A debt consolidation loan is a new loan to combine multiple debts into a single loan. If you qualify, the consolidation loan money is used to pay off your creditors, and from there, you make a single monthly payment to the new loan.

A debt consolidation loan doesn't reduce the amount of debt you owe. However, a debt consolidation loan with favorable terms (like an affordable interest rate) could make your debt easier to repay. 

Since you're not having any debt forgiven, you don't have to worry about a tax bill. 

The cost of debt consolidation depends on the interest rate you get on your new loan, and any origination fees charged by your lender.

Chapter 7 bankruptcy

In a Chapter 7 bankruptcy, the court may sell some of the things you own and send the money to your creditors. Your remaining debts that qualify are discharged (forgiven). With a Chapter 7, you may not have to repay your debts in full, similar to debt settlement. Chapter 7 is usually complete within a few months after you file.

Not everyone qualifies for Chapter 7. If you can afford a payment, you won’t be able to file for Chapter 7. Debt forgiven through bankruptcy is not taxable. 

The cost of bankruptcy depends on the type of bankruptcy you qualify for, the complexity of your case, court fees, and whether you hire an attorney.

Is debt relief the right choice?

You may be asking, “Is Freedom Debt Relief legit?” We'll help you understand all your options for dealing with your debt, including our debt relief program. Our Certified Debt Consultants can answer any questions or concerns you may have and help you find the right path forward. Find out if you qualify right now.