Debt Relief Companies

What Do Debt Relief Companies Do?

Debt relief companies are for-profit businesses that charge you to negotiate with your creditors (the lenders you owe money) on your behalf. Their goal is to get creditors to accept less than the full amount you owe in exchange for settling the debt.

These companies often tout the possibility of drastically lowering your outstanding debt. That may sound great, but the reality is that debt relief companies' tactics with vendors can decimate your credit standing. Here are some hard realities to consider about the ways they work:

• Prior to negotiating with your creditors, debt relief companies typically instruct you to stop making debt payments and instead make an agreed-upon monthly payment into a savings account they set up for you, often for a fee. After you've paid into the account for several months, the debt relief company approaches your creditors as your representative, essentially arguing that the creditors will be better off settling for partial repayment of your obligation than risking getting no payment at all. The implicit threat is that you're at the end of your financial rope, and that if you file for bankruptcy, lenders may be unable to collect anything you owe them.
• If the debt settlement company is successful in its negotiations, it typically keeps 20% to 25% of your total debt as payment, and may charge you fees (for maintaining your savings account, for example) as it pays off the reduced debt on your behalf.