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Should I work with a debt relief company or my creditor to pay off debt?

There are many pitfalls to watch out for when dealing with a debt relief company

Summary

Working directly with a creditor can be advantageous when compared to a debt relief company, but you may need professional input to help you negotiate the best terms.

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Creditors are willing to work with borrowers in today’s harrowing economic environment so that both parties can come out ahead.

In this spirit, reader Robin has received a debt payoff offer from her credit card issuer.

Robin writes, “I have a really high balance on my credit card, over $20k, and the creditor called to offer me a plan to reduce my interest rate from 17% to 0.99% and pay off my balance in 5 years with a $400 (per month) payment. I was going to go through a debt relief company to do the same, but should I take this deal from the creditor?”

Check out all the answers from our credit card experts.

Ask Poonkulali a question.

What a debt relief company can do for you

When they are in over their heads and can’t tackle their debt, people sometimes turn to debt relief companies for help.

Such companies have also been known to aggressively market their services to targeted individuals. Debt relief companies can come up with a settlement plan and negotiate with your creditors to help you pay off your debt.

Typically, the settlement plan involves your setting aside a sum of money monthly in an escrow-type account that a third party handles until a balance is accumulated. The debt relief company can use the balance to negotiate with your creditor. In the meantime, you will not be paying your creditor the monthly payment due.

When the debt relief company negotiates with it, the creditor might be willing to accept a payoff that’s lower than the amount you owe considering that it might not get any return at all if you become insolvent.

See related: Credit card issuers offer cardholders relief amid coronavirus outbreak

Pitfalls of working with debt relief companies

You should watch out before working with such companies, as the Federal Trade Commission warns:

  • They could make false promises to you of getting your debt settled for a specific amount, for “pennies on the dollar,” or within a defined time frame, whereas in reality they don’t have any control of such outcomes.
  • If a company tries to get an upfront fee from you before you even sign up for its program, that’s a red flag.
  • A debt settlement company should explain to you risks of going through its program.
  • Be wary if it talks about any “new government program” that will help relieve you of your debt burden.
  • There will be consequences to your credit score if you cease making payments on your debt.
  • If you stop communicating with the creditor directly, you may not be aware of the real picture.
  • Working on a debt settlement plan also doesn’t stop calls from debt collectors and lawsuits.

Also, after taking into account the debt relief company’s fees, you may not even come out ahead. You may well find that you paid the company more than you saved from working with it.

And in case the debt settlement plan is successful and the creditor forgives some of your debt, you could owe taxes on the forgiven debt as the government would see that as taxable income. And since you pay less than you originally agreed to, that also hurts your credit.

To avoid working with an unsavory debt relief company, the FTC advises that you do research via your state’s attorney general and local consumer protection agency. You could also do a web search to see if there are any complaints or lawsuits against the firm.

See related: Is debt consolidation right for you?

A professional advisor could help you negotiate better terms

Robin, considering that your creditor has offered you a deal, it might be better to work directly with this company. However, there is a catch. The deal the creditor is offering you is not exactly the most advantageous to you.

According to attorney Leslie H. Tayne, founder of Tayne Law Group, “this is not an agreement we would generally encourage anyone to accept because the reader would still be paying the full balance plus interest. A true settlement would be an agreement with the creditor to pay less than the balance owed.”

Becky House, education, housing and communications director at American Financial Solutions, a nonprofit credit counseling agency, also pointed out that your creditor’s offer means your debt would be paid in full, rather than settled.

However, she noted that going through a debt relief company could significantly damage your credit.

“The idea is that a creditor will be more willing to accept a lump sum because the account is going further and further behind. In addition, part of the money being paid to the settlement company is paying the settlement company – not the creditor who is owed money,” House said.

You may consider working with a nonprofit credit counselor to see if it could advise you on negotiating better terms by working directly with the creditor. You could start off by offering a low settlement amount and then hitch it up if necessary. This advisor could also help you explore any other options you have to deal with the debt.

See related: Should you consider a credit repair service?

Bottom line

“Working with a reputable firm could help the reader in this situation, because the firm would understand this person’s individual financial situation, including assets, income, taxes, etc.,” Tayne said. “It’s generally advisable to work with a professional because a professional will understand what is considered a reasonable settlement based on the client’s specific circumstances. A professional will also make sure that the process is handled correctly and that no issues arise for the client.”  

Robin, I hope this helps you work with your creditor to negotiate better terms.

See related: How to pay off credit card debt

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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