An alternative to a debt settlement company is a non-profit consumer credit counseling service. These non-profits can attempt to work with you and your creditors to develop a debt management plan that you can afford, and that can help get you out of debt. They usually will also help you develop a budget and provide other financial counseling.
Also, you may want to consider consulting a bankruptcy attorney, who may be able to provide you with your options under the law. Some bankruptcy attorneys will speak to you initially free of charge.
Warning: There could be tax consequences for debt forgiveness. If a portion of your debt is forgiven by the creditor, it could be counted as taxable income on your federal income taxes. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax.
For servicemembers with loans taken out before entering active duty military service, the Servicemembers Civil Relief Act (SCRA) provides a variety of protections, including an interest rate reduction down to 6 percent and foreclosure protections. Download our fact sheet to learn more.
If you are on active duty when you refinance or consolidate your loans, the new loan will not be covered under the protections of the SCRA since it is no longer considered a pre-service loan. For example, if you took out a student loan before you entered active duty, but then consolidate that student loan after entering active duty, you would not then be able to request an interest rate reduction down to 6 percent on that new consolidation loan. Or, if you took out a mortgage before you entered active duty, and refinance during active duty, you would lose the foreclosure protections provided under the SCRA.
If you still have questions about your rights under the SCRA, contact your closest legal assistance (JAG) office for more information. You also may be able to get assistance from your state attorney general .
FAQs
Cons of debt settlement
Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.
Is it worth doing a debt relief program? ›
Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. "One of the biggest advantages of going through a debt relief program is the savings.
Is there really a debt relief program from the government? ›
Unfortunately, there is no such thing as a government-sponsored program for credit card debt relief. In fact, if you receive a solicitation that touts a government program to get you out of debt, you may want to think twice about working with that company.
Is it bad to use a debt relief company? ›
Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you. Unless the debt settlement company settles all or most of your debts, the built-up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.
What is the disadvantage of debt relief programs? ›
You May End Up with More Debt Than You Started
Additionally, just because a creditor agrees to lower the amount you owe doesn't mean you're free and clear on that particular debt. Forgiven debt could be considered taxable income on your federal taxes.
What are the problems with debt relief? ›
Using debt settlement options to reduce debt comes with several risks, including late payments on your credit report, potential charge-offs, settlement company fees, tax implications on forgiven balances, possible scams and the overall risk of settlement offers not working.
Can I still use my credit card after debt settlement? ›
While you can still use your open credit card accounts after debt consolidation, consumers should do so with caution. If you do use your credit card after debt consolidation, be sure to pay off your balance regularly.
How to get rid of 10,000 credit card debt? ›
7 ways to pay off $10,000 in credit card debt
- Opt for debt relief. One powerful approach to managing and reducing your credit card debt is with the help of debt relief companies. ...
- Use the snowball or avalanche method. ...
- Find ways to increase your income. ...
- Cut unnecessary expenses. ...
- Seek credit counseling. ...
- Use financial windfalls.
The 8 best debt relief companies of April 2024
| Debt Relief Companies | Best for |
|---|
| Featured partner National Debt Relief | Best for credit card debt |
| Money Management International | Best overall |
| Accredited Debt Relief | Best for customized options |
| Americor Debt Relief | Best for all unsecured debt types |
4 more rowsDebt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose.
If you received a Pell Grant in college and meet the income threshold, you will be eligible for up to $20,000 in debt relief. If you did not receive a Pell Grant in college and meet the income threshold, you will be eligible for up to $10,000 in debt relief.
Does debt forgiveness hurt your credit? ›
Credit card debt forgiveness could hurt your credit
You stop making payments to your creditors as you save for your settlement. Creditors typically report the debt as "settled" rather than "paid as agreed" on your credit report once it's paid off. This shows that the creditor wasn't able to collect on the full debt.
What is the downside of freedom debt relief? ›
How Will Freedom Debt Relief Affect My Credit? Debt relief can negatively affect credit scores because creditors typically aren't willing to negotiate until you're behind on payments. Payment history carries the most weight for FICO score calculations, so if you're paying late or not at all, your score can take a hit.
Can I buy a house after debt settlement? ›
Yes, you can buy a home after debt settlement. You'll just have to meet the lender's requirements to qualify for a mortgage. Unfortunately, that could be harder after you settle debt.
What are 3 things that a debt collection agency Cannot do? ›
Debt collectors cannot harass or abuse you. They cannot swear, threaten to illegally harm you or your property, threaten you with illegal actions, or falsely threaten you with actions they do not intend to take.
How bad is debt settlement for your credit? ›
Debt settlement isn't good for your credit scores because you're paying less than the amount you agreed to repay, but it may be better than having an unpaid account that's past due or in collections. USA TODAY Blueprint may earn a commission from this advertiser.
