Purpose
Since the United States economic downfall of 2007, many consumers have come to realize that they have overwhelming amounts of debt. To make matters worse, some of these individuals have faced job losses or pay cuts. Debt relief companies provide certain services depending on your unique situation and the organizations themselves. The Federal Trade Commission (FTC) recommends that you exercise caution when planning to use such services, as they can cost you more money, or even worsen your situation. Also, some services may lure you into the bankruptcy process without fully discussing all options with you. Be wary when choosing debt relief service companies and check their credentials with the FTC.
Debt
Debt relief works to reduce your unsecured debt. Unsecured debt refers to credit cards, personal loans and medical bills. Other types of debt, such as mortgages and car loans, are secured debt and are not applicable for debt relief programs. This is due to the fact that these types of debt are collateral, and you pay until you own them.
Services
There are two types of debt relief: debt management and debt settlement. Debt management relief services contact your creditors to help reduce your interest rates. Also, all your unsecured debt is combined together so that you make one payment. This way you pay more toward your principle balance rather than steep interest rates. Thus, you will pay your debt off more quickly. However, most companies charge a monthly service fee. The amount depends upon which state you reside in as well as the amount of debt you owe. Shop around with different companies to get the best rate possible. You may consider a non-profit organization, as their fees tend to be lower.
Debt settlement is known as a debt negotiation, and unlike debt management, it can adversely affect your credit. With debt settlement, you pay service fees and pay less towards your original debt as you would with debt management. The difference is that you reach an agreement with your creditors to pay much less than what you previously owed them. Creditors are likely to agree to this type of negotiation, because they see that you may be on the verge of bankruptcy. In bankruptcy, your creditors would not receive any money. Hence, their initial loss would be better than not getting any money at all.
No matter which option you choose, keep in mind that these are long-term plans. Also, if you miss any payments while working with a debt relief service, all payment agreements may be void.
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