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What to look for in a debt relief program

Are you ready to compare your debt relief options? Here's what you should look for when you do.  Getty Images/iStockphoto

Credit card debt can be overwhelming. And, with average credit card interest rates hitting record highs, it can be difficult to get ahead. Moreover, the menial percentage of minimum payments that typically go to principal balances makes it seem like credit cards are structured to keep you in debt. 

But if you're ready to take the next steps toward paying your credit card debt off forever, you may be ready for a debt relief program

That can create a challenge. After all, if you haven't used a debt relief service in the past, you may not be sure what to look for as you shop for one now. So what should you look for in a debt relief program?

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What to look for in a debt relief program

If you're ready to take control of your financial future and make changes to get out of credit card debt, here's what you should look for in a debt relief program to work with: 

Start by weeding out the scams

"Scams around debt relief are abundant and there are many programs that may not best suit your individual needs," says Stacey Black, lead financial educator at BECU. "Do your research with the Better Business Bureau, or your state attorney general's office, before signing up for anything."

If you find a poor Better Business Bureau (BBB) rating coupled with complaints reported to your state attorney general's office, you may want to avoid that provider. However, if the debt relief company has a strong BBB rating and no complaints with your state attorney general's office, you may be more likely to have a positive experience with them. 

Get in touch with a trusted debt relief solution today

Upfront fees

If a debt relief company charges you an upfront fee, it could be a sign of a scam. In some cases, these companies break the law when they charge fees in advance of the services they provide. For example, it's illegal for debt settlement companies to charge upfront fees. 

Even in cases where doing so isn't against the law, it's not necessarily ethical for companies to charge you before providing a debt relief service. So, it's wise to avoid those that do so. 

How the debt is addressed

There are three ways debt relief services typically address high interest rate credit card debt, and each offers a different level of relief and different potential consequences. These include: 

  1. Debt consolidation loan: If you're a well-qualified borrower, a debt consolidation loan may be all you need to get rid of high-interest debt. These loans are designed to consolidate multiple loans into one easy-to-manage account. These loans typically come with competitive interest rates and fixed payment structures that offer a clear path to payoff. 
  2. Debt management program: These programs help negotiate better terms and payoff plans with your current lenders. Once negotiations are complete, the debt consolidation experts will create a fixed payment plan that's designed to get you out of debt efficiently and affordably. You'll make a single monthly payment to the debt relief company and the company will pay your creditors as agreed on your behalf. This typically results in account closures — which may have a short-term negative impact on your credit score. 
  3. Debt settlement: With debt settlement, you stop paying your creditors and send payments to the debt settlement company. The company stores your payments in a special-purpose savings account until you've saved enough money to start settling your debts. At this point, the company negotiates settlements on your behalf, typically settling your debts for a fraction of what you owe. Although this service offers the highest potential level of relief, it also typically comes with the most detrimental impact on your credit score.  

The interest rates and fees

If you opt for a debt consolidation loan or debt consolidation service, it's important to consider the interest rate and fees you'll pay. After all, if the interest rate on the new loan is only slightly lower than you're currently paying and fees are significantly higher, the consolidation may not be advantageous.  

The payoff term

Brandon Robinson, president and founder of the financial planning firm JBR Associates, recently told CBS News that "if a person is not able to absolve the debt (through settlement or consolidation) within a 36-month-period with lower monthly payments, then filing for bankruptcy may be the best option."

So, look for a payoff term of three years or less. If that's not possible, your best course of action may be to reach out to a bankruptcy attorney. 

The bottom line

There are several options to consider when you choose a debt relief service, and each option comes with its own set of pros and cons. So, it's important to do your research and make a well-informed decision based on the factors above. 

This story has been updated to clarify the difference between debt management and debt consolidation programs.

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