According to a recent survey, almost 42% of American adult credit card balances significantly increased in 2020. The statistics show that many people in America and globally are struggling with debt.
Fortunately, there are tons of debt relief companies like Freedom Debt Relief that can help you find a way to clear your debts.
This article will focus on understanding debt relief companies.
How Do Debt Relief Companies Work?
Debt relief companies (also known as debt settlement companies) charge you to negotiate with your creditors to accept a lesser amount in agreement to settle your outstanding debts.
Usually, before any negotiations occur, the company will instruct you to cease making any payments to their creditors.
They then guide you to open an account and deposit a certain amount of money monthly. Most debt relief companies will charge you to open this savings account.
After depositing money into that account for some time, the debt settlement company will begin negotiating with your creditor(s).
The relief company’s goal is to convince creditors that they would rather accept the amount offered (that is, the money available in the account) rather than risk a bad debt.
If the negotiations are successful, the debt relief company will keep approximately 25% of the money in the account as payment for their services.
Is It a Good Idea to Use a Debt Relief Company?
Do you benefit from working with debt relief companies? The simple answer is yes.
If you have overwhelming debt, you get an opportunity to pay less. What’s more, the debt settlement process is faster compared to other debt repayment methods. Another advantage is that it prevents you from filing bankruptcy. This benefits both parties.
If you file for bankruptcy, it will remain on your credit report for seven years (if you file for Chapter 13 bankruptcy) or 10 years (if you file for Chapter 7 bankruptcy.) This is a longer period compared to a debt settlement.
What’s more, most creditors admit that they would rather accept the amount offered by debt relief companies instead of allowing you to file for bankruptcy.
Working with a debt settlement company may also protect you from legal action by the creditor, for example, a credit card company.
How Do Debt Relief Companies Get Paid?
Some debt settlement companies charge a certain percentage of the debt they settle. The amount is based on the money you owed when you enrolled for the services.
For instance, if you have a debt of $12000 and the debt relief agency charges 25% of the original debt, you will pay $3000 for the services. On the other hand, some will charge a percentage of the amount agreed to be paid to the creditor if the negotiations are successful.
For example, if you have a $12000 debt and the debt relief company successfully negotiates with the creditor to accept $8000, you will pay the agency $2000 (25% of the amount paid).
How to Choose a Debt Relief Company
There are a couple of factors you need to consider when selecting a debt settlement agency. For starters, it’s essential to inquire about their charges. Most debt relief companies charge between 15-25% of the original debt amount or the amount agreed upon by both parties at the end of the negotiations.
This will help you assess whether you can afford those services, given that you still have a debt to be paid. It is also essential to check whether a particular debt settlement company is licensed. Most states in the United States require debt settlement agencies licenses.
Debt settlement agencies go a long way in helping you find an easier way to settle your debts. However, understanding debt relief companies, how they work, and what charge for their services is critical to your success. When you have the information, you can determine whether it is the best way to clear your debts.