What are debt settlement programs?

If you’re in debt, you’re certainly not alone. The Federal Reserve estimates that Americans have over $15 trillion in consumer debt. However, if the debt feels like a hole that you may never be able to dig yourself out of, you may be considering a debt settlement program. Here’s what to consider when choosing between debt settlement programs.

Is debt settlement right for you?

Debt settlement is handled by for-profit companies that negotiate with your creditors to help you pay off your debt. The negotiations will be for a “settlement,” which will be a lump sum in an amount less than you currently owe, or for an amount you make monthly payments towards until complete. To be able to make that lump sum or payments, the company will make you set aside a certain amount in savings every month and transfer it to an account until you accumulate enough funds to pay off the settlement.

The risks of debt settlement programs

Debt settlement programs can only be effective if you stop making your monthly payments to creditors and instead put that money into the account. You are saving up money before they can begin negotiating a settlement, which can make it a risky arrangement since you could be sued by aggressive creditors during that time.

Another risk of debt settlement is that some people have trouble making the monthly payments long enough to settle all their debts. And your creditors aren’t under any obligation to negotiate a settlement, so your debt settlement company may not be able to strike a deal with all your creditors, though that is rare. On top of that, because you are no longer making payments, this process will negatively impact your credit scores. Late fees and penalties you may incur will add to your debt, and ultimately you could be sued by your creditors. If you’ve taken into account all of the risks and think that debt settlement is right for you, then it’s time to consider who you want to work with.

Related article: 5 steps to rebuild credit after debt settlement

Choosing between debt settlement companies

Before choosing a company, check with your state’s attorney general as well as your local consumer protection agency to see what kind of consumer complaints may be on file for the company you selected.

Many large and highly rated debt settlement companies won’t work with you if you have less than a certain amount of unsecured debt. Some also may charge you a fee as high as 20 to 25% of your total debt.

There are certain red flags to watch out for. Be wary if a debt settlement company that:

• Tells you about a “new government program” to help rid you of credit card debt
• Guarantees they can eliminate your unsecured debt
• Doesn’t explain to you the consequences of suspending payment and communication with your creditors
• Tells you they can stop lawsuits and debt collection calls
• Asks you to make payments for a debt management plan before your creditors have accepted the terms
• Charges you a fee before they settle your debts or before you enter into a debt settlement plan
• Doesn’t spend much time getting information on your full financial picture, or your near-term financial goals

How debt settlement companies differ

Some of the major differences between debt settlement programs are the fees they charge, the minimum amount of debt they require to be settled and the types of debt they will work with. Here is a look at some of the major debt settlement companies:

Freedom Debt Relief — This is the largest debt settlement company in the United States. They say they have resolved more than $9 billion in debt since 2002. However, you’ll likely need at least $7,500 in debt to work with them. Freedom’s fee ranges from 15 to 25% of your total enrolled debt. Like Resolve, Freedom Debt Relief offers access to a wide range of debt relief products and consultants that will help you formulate a comprehensive plan. Resolve, however, does not have minimum debt requirements, has a fee of just 15% on your forgiven debt (not total debt enrolled), and helps you determine if debt settlement is the best debt relief option for your particular needs.

CuraDebt — CuraDebt has worked nationwide since 2000 and bills their fees off of the total debt that is being managed. Consumers using CuraDebt can expect to pay fees of about 20% of their total debt in the program. Resolve, by comparison, charges 15% of the amount consumers save, not the total amount of their debt and helps you determine if debt settlement is the best form of debt relief for your situation.

New Era Debt Solutions — New Era lists right on their website their debt settlement statistics, including how many people drop out before completing the program, as well as the average amount of debt they settle per account, which they say runs at more than a 60 percent reduction on average. Unlike Resolve, New Era focuses solely on debt settlement programs, so you’ll want to be sure this is the right debt solution for you before reaching out.

National Debt Relief  — This is a newer organization that has been in operation since 2009. National Debt Relief will tailor a debt settlement plan to fit your needs and your specific types of debt, and may tackle a range of debts that other companies might not touch, including some student loans. Unlike Resolve, they focus solely on debt settlement, so you’ll want to be be sure this is the right debt relief for you. Also, they don’t operate in every state.

While you can negotiate with creditors directly, you’ll have to do your own research. You can calculate what you might save with a debt settlement calculator and then use a debt consolidation calculator to assess if this is a viable option for you instead. You can also use a credit card payment calculator to assess how long it will take to pay off your credit card(s) if you don’t choose a settlement plan.