Is debt relief too good to be true?
National Debt Relief is a program that helps consumers get out of debt, giving them hope where they may not have had some before. If a borrower of a loan starts to struggle with their monthly repayments, National Debt Relief can step in and renegotiate terms with the creditors to reduce the amount owed. Doing so gives consumers a lifeline they desperately need, however, is that service too good to be true?
How Does Debt Settlement Work?
If you are considering a debt settlement program, whether, from National Debt Relief or a competitor, such as Freedom Debt Relief, it is essential to understand how it works and what your role will be. If debt settlement is your desired approach to handling your outstanding loans, you will first need to get in contact with a debt settlement company, also known as a debt relief or debt adjusting company.
Your chosen company will then reach out to your creditors to either negotiate a payment plan that works better for you or a single lump sum to get paid back, which will be less than the outstanding amount. Though not ideal for your creditors, they sometimes do accept that it’s better to get paid something rather than nothing. While the debt settlement company works on their negotiations, they require you to set up and make deposits into a savings account regularly. It is this money that will cover the lump sum amount requested by your creditors. Some debt relief companies will advise you to stop paying your creditors through this negotiating period.
Once an agreement between the debt settlement company and your creditors gets reached, you must sign off on the agreement. It is at this point that the agreed lump sum gets paid back to the creditors. If a debtor has multiple outstanding debts, a debt relief company considers the negotiations a success if a minimum of one of those debts receives new terms. With the debt cleared, the debt settlement company will require you to cover their fees.
The Positives of Debt Settlement Services
The process seems relatively straight forward. You contact a debt settlement company, and they negotiate with your creditors on your behalf. In the end, you pay back less than what you initially owed. On top of that, if things don’t work out and no settlement gets reached, the debt settlement company will not charge any fees. Finally, it can help people who are stuck with debt, and their only other option is to declare bankruptcy. However, bankruptcy might not be as bad as it sounds when you consider the risks of using a debt settlement service.
Debt Settlement Services Come with Risks
Before committing to any financial aid, it is crucial to understand what you agree to. Contracting the services of a debt settlement company won’t necessarily leave you in the clear. Though there is no fee for an agreement that does not get reached, you will still have outstanding debts to pay. You might not even get to the negotiating phase as some creditors straight-up refuse to negotiate with debt settlement services. Along with not reaching an agreement, other risks may come with using a debt settlement service:
- You May End Up with Even More Debt
- Even if a debt settlement company successfully negotiates a lower lump sum for you to pay, and you pay it, you are still not free of debt.
- The forgiven debt amount then gets considered as part of your taxable income.
- If your outstanding debt consists of $20,000 and the debt relief services manage to reach a final lump sum of $15,000, the $5,000 difference will need to get filed as part of your federal income taxes, meaning you may need to pay tax on it.
- Additional income tax might not be something you have budgeted for, as you are struggling to pay your current debts as it is.
You Can Incur Fees, Even If All Your Debt Is Not Settled
As stated above, a debt settlement company will not take any fee if they don’t successfully renegotiate terms with your creditor. You need to agree to those terms and make at least one payment to the creditor for that fee to get charged. Sounds fair, but some debt settlement companies may require you to pay a portion of their full outlined fee on the debts that they could not settle. Alternatively, they may charge fees based on how much debt they settled. When you sign up for their program, you state how much debt you wish to get cleared, otherwise known as enrolled debt. If the company works intending to get $10,000 worth of debt cleared up, though only manages to sort out $5,000, they can charge 50% of the initial agreed-upon fee, though the fee may have been lower if you only intended for $5,000 worth of debt to get cleared.
Your Credit Score Can Take A Hit
Depending on how a debt settlement company works, they may require you to stop paying your creditors and instead put that money into a savings account. That money will then contribute to the lump sum that comes from the negotiations. However, this can happen before that debt negotiation period has even started. It’s not clear if your creditors will even agree to discuss terms with the company. These missed payments may get taken as delinquent payments, which will affect your credit score. A debt relief company may counter that if you are struggling to make payments towards your debts, your credit score has already taken a hit, and the sooner the problem gets fixed, the sooner you can get back to building your score back up. However, your creditors may hand your debt over to a debt collector or chase your outstanding payments via a legal process, leaving you in a worse position than you were in before.
Seeking Aid from National Debt Relief
With the pros and cons laid out on the table, you have the information to decide whether to proceed with a debt relief company. One such company is National Debt Relief. They have received numerous rewards for their services, including:
- The 2020 gold award for best overall debt relief company, from Top Ten Reviews.
- An A+ rating from the Better Business Bureau.
- The top spot in the 2020 best debt relief program, put together by Top Consumer Reviews.
Qualifying for The National Debt Relief Program
Before contracting the services of the National Debt Relief Program, you must qualify.
National Debt Relief will work with consumer debt if the amount of the unsecured debt is as low as $7,500 or as high as $100,000. Those debts can stem from credit cards, lines of credit, a personal loan, student loans, medical expenses, or business loans. However, federal student loans are not covered. Other types of loans and similar forms of outstanding debt that National Debt Relief will not assist with include:
- IRS debt
- Utility bills
- Auto loans
- Mortgage loans
- Other types of secured debt.
Secured debt comes from a type of loan that gets covered with collateral.
Upon sending your application to National Debt Relief, they will perform a soft credit pull to gauge your outstanding loan amount and who you are indebted to. A soft credit pull will not hurt your credit score. Once it is clear you have met the requirements outlined by National Debt Relief, you will begin the process of settling your debts.
National Debt Reliefs’ Process for Debt Settlement
Once you contract the services of National Debt Relief, they will ask you to open a savings account in your name. They will then assess your debt and income, and set a monthly amount for you to transfer into that account. This amount will be lower than your usual loan repayments because if you are hiring a debt settlement service, you couldn’t afford them in the first place. As addressed above, you will also stop paying your creditors, who will consider your payments delinquent, which can incur late fees and additional interest. It is at this point that your credit score will take a hit.
While you are paying into your new savings account, National Debt Relief has got to work contacting your creditors who you owe the enrolled debt to. They will attempt to negotiate with each of your creditors, aiming to persuade them to accept a lower lump sum amount than what you initially owed. They hope that because you have stopped making payments, your creditors will accept the terms to get some of their money back, relieving you of your burdensome debt.
If an agreement gets reached between the two and you accept the terms., you will use the money you saved in your savings account to pay your creditors. You will pay in one lump sum or installments, depending on what terms National Debt Relief proposed. Typically, the first payment gets made between three and six months of the agreement getting signed. Once the debt gets settled, National Debt Relief collects its fee.
The Cost of Using National Debt Reliefs’ Services
A debt relief company always collect their fees once you have finished with the settled debt, and their service is no longer required. The FTC or Federal Trade Commission made it illegal for such companies to charge an upfront fee in 2010. As a customer of National Debt Relief, you can expect your final cost to be between 15% and 25% of the total amount of outstanding debt you have entrusted to the company. Many savings accounts that get opened to cover the lump sum also require an initial setup fee and monthly service fee, which is not part of the above percentage. To give some perspective to what you have to pay back and help you decide if it’s worth your time, National Debt Relief claims that its customers approximately save up to 30% of their money, which includes both the debt reduction and the companies fees when compared to what they originally owed.
It Is Not An Instant Service
It would be wrong to think that you can call National Debt Relief, and expect a call back the next day to hear your debts settled. However, many consumers don’t truly understand the time commitment they are making when they sign up for such a program. The amount of your total debt and how much you can afford to pay will affect how long you stay in the program. Nation Debt Relief state that their customers are usually in their program for between two and four years.
Your Alternatives to Debt Settlement
Debt settlement through National Debt Relief or a similar company is an option for consumers dealing with debt, though most consumers that use such services aren’t at a point where they are delinquent of their payments. Instead, they are making the minimum payments on their debts or getting close to being in that situation. They are digging a hole but not yet stuck at the bottom, and there are alternative debt relief options for those people. Yes, a debt settlement company may be able to reduce your loan amounts. Still, there is never a guarantee, so it is worth exploring alternative avenues before committing to a service. If that is your only option, make sure you use National Debt Relief or a similar FTC registered company, as there are debt relief scams out there. If you have time to consider alternatives, other ways you can manage your debt include:
- Negotiate Your Debt Settlement on Your Own.
- Creditors do not wish to squeeze you for every penny, despite how many people may feel. Your creditor is ultimately a human being, which comes with the ability to be understanding. You should consider cutting out the middle man and working with them directly to resolve your debt issue.
- Put together a detailed list of what you owe and to whom, along with establishing a sense of priority. Who needs to get paid first? Also, work out what you can pay. If you take time to do the numbers, you might find that you can use one of the below alternatives that won’t have such an adverse effect on your credit score, as debt settlement will.
If debt settlement is your only option, also take the time to research your creditors. They should have outlined terms for debt settlement, which will help you to better gauge your position. You may find that some won’t settle at all. Typically, a creditor will settle for a lump sum for between 20% and 50% of what you owe to them, so start up your own savings fund to prepare for this amount. They may agree to receive monthly payments if you can’t cover the lump sum directly. If you owe money to a financial institution, you should not open the savings account with them. They will be able to see your monthly payments and wonder why you are not paying them directly.
Once you have reached your desired amount, reach out to your creditor/s and put forth your proposal. You should explain why you cannot pay back the full amount and offer them a fixed amount, as opposed to a percentage, which will help everyone understand what position you are in. Your creditors may accept your offer, or come with back with a counteroffer. It is up to you to negotiate terms that you can meet. Once agreed, get the terms in writing and pay off your debts.
Unfortunately, debt settlement, whether through a company or yourself reaching out to your creditors, comes with the same risks. You will have to stop making debt payments to save for the lump sum, which will make your debt payment delinquent. You will then incur late fees and have your action reported to the credit bureaus, leading to a hit in your credit score. Your creditors may also wish to take legal action before you can put forth your proposal.
Consolidate Your Debt
Instead of trying to pay off all your outstanding debts, you can reorganize them into one easy to manage debt consolidation loan. Doing so is called, as the name suggests, debt consolidation. These are special types of loans to help you deal with your debt. You can borrow a lump sum that matches your debt amount. You then use that money to pay off your debt while ensuring your new single loan has terms that you can manage, whether a better interest rate, a shorter loan period or both. Many big-name banks also work as a debt consolidation company, so you won’t have to search far for a debt consolidation loan.
Alternatively, you can get a balance transfer credit card, which will let you transfer your outstanding debts to your credit card. Then, you pay back your credit card debt, though that is the only debt you will have to pay. Some of these cards come with special terms that can help a consumer get out of a difficult situation. One example is the introductory period, where the credit card provider will not charge interest on the incurred amount, which gives you a chance to get on top of things. The downside to balance transfer cards is that they come with a credit limit, which may be less than your outstanding debt. They may also charge a balance transfer fee. Finally, you will also need a good credit score to apply for such a card.
Seek Out A Debt Management Plan
Debt arises due to improper handling of funds and purchases out of your means. With that being the case, you will likely struggle to manage your debts, which is why many Americans have difficulty trying to get out of debt. To counter this, you can work with a non-profit credit counseling agency to put a debt management plan in place. The debt consolidation program plan put forth typically rolls your outstanding debt into one package, with the repayments then usually lasting between three and five years. Unfortunately, these plans tend to tailor to credit card debt, as opposed to other forms of debt. However, they can be useful alternatives if your credit score won’t allow you to get a balance transfer card.
These plans can come free of charge though they may just come in the form of credit counseling advice. If you require a more hands-on approach from a credit counselor, you can pay a company to put a plan together for you. If you prefer to pay for a service, make sure the Debt Management Plan provider is FCA or Financial Conduct Authority approved.
Declaring Bankruptcy
Bankruptcy may seem like one of the bleakest debt solutions and rightly so. A person who declares bankruptcy may suffer repossessions, charge-offs, and foreclosures, all of which will kill a person’s credit score. Though this is true to an extent, if you are considering bankruptcy, your credit score is most likely ruined already. However, once the debt gets cleared, that credit score will once more start to rise. So you are free of debts, you have no more collection calls, and your credit score is finally healing. Filing for chapter 7 bankruptcy can remove credit card debts, personal loans, and other financial obligations, such as overdue rent. Tax debt, child support, and most student loans cannot get erased, but it’s still a lot less to worry about.
Bankruptcy is not for those who still have options. If you have to choose between paying your bills and going out for drinks, your priorities need reassessing, and bankruptcy is not for you. Any future credit limits will be lower than they used to be, and it will take ten years for the bankruptcy to get wiped from your credit report. Debt settlement will not have such an adverse effect on your ability to take out future loans, though if you are in a position where even debt settlement won’t help, you might not have a choice.