Updated on 09.16.14

Debt Reduction & Debt Relief Programs: What’s the Catch?

Trent Hamm

One of the most frequent issues that readers contact me about is more information about a debt reduction or debt elimination program that they heard about on the radio on their way home from work. “The people on there claim to have eliminated 90% of their debt. Can that be for real? What’s the catch?”

I’ve looked into a few of these programs and I’ve noticed that most of them have a few big traits in common.

First, their claims are true – but carefully worded. Usually, the claims look only at one narrow dimension of a person’s financial state – how does their debt level on one date compare to their debt level on another date? In that strict and narrow sense, the programs can be seen as successful – but that narrow window leaves out a lot of factors.

For one, some of the programs wreak havoc on your credit report and credit score. Depending on the exact program, they will play hardball with your creditors, which will sometimes succeed in gaining you a strong reduction in your debt level. However, this will often also include a final negative note on your credit report indicating that your debt was negotiated, which will have a negative impact on your score for years to come. This has a hidden cost, of course – higher insurance rates and higher interest rates on any debts you might incur (like a car loan).

For another, some of the programs charge a hefty fee for a simple debt consolidation. One program I’m familiar with consolidated one person’s debt into a convenient low monthly payment. However, this new consolidated debt had a higher interest rate than almost all of the other debts and, combined with that lower payment, meant that the person involved would be paying on that debt for many years to come.

Finally, most of the tactics from these programs are well known and are shared all over the place. Setting up a debt repayment plan is actually pretty simple, as is negotiating with your creditors. People can do this on their own without paying for the services.

What these plans offer is guidance for people who feel lost and don’t step up to empower themselves. Many people who are responsive to these ads are obviously in a bad situation, but the real kicker is that they feel very lost in that situation. They don’t know where to turn for help – and here’s a service that’s pledging to solve that very problem. When you’re being overwhelmed by a problem, a safety rope sounds incredible, no matter where it comes from.

These programs do put a plan in place for you, but that plan is often an expensive one, both in terms of the direct cost of paying for the service and the indirect costs such as the effect their plan may have on your credit report.

Try the well-known tactics by yourself first, and use great caution if you’re considering using a debt reduction or debt elimination program. You are always better off trying to solve debt problems for yourself first. Try to assemble your own debt repayment plan, for starters – creating that plan (and going through a few basic steps to improve your interest rates) can often make a seemingly impossible problem seem quite accessible. If you still need help, ask for help from people you personally know first – not in terms of loaning you money, but in terms of helping you come up with a plan that works for you.

If you’re still having troubles, then consider some professional help – but be careful. I recommend seeking a non-profit credit counseling service first, as they’re not as motivated by the need to raise money from your situation.

Good luck!

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  1. Michael says:

    I would have liked to have seen specific examples and real ad copy.

  2. matt @ Thrive says:

    Good article, Trent – we always tell our users to stay away from these services, as most of them are just doing what Thrive does for free: organize your debts, reduce rates wherever possible, then tell you how much to pay towards each debt, starting with the highest interest rates.

    Thrive does it automatically but you could easily do this by hand and there is no reason to go further in debt paying someone else to do it for you!

  3. Jason says:

    I also push my clients away from these types of companies, especially when you can take care of it yourself.

    I will also point out to people that they need to look at taking care of the real problem. The real problem is overspending and not living on a written plan (budget). The debt is the symptom to the real issue at hand. If you can’t rid yourself off the real problem you will be right back in debt or even deeper in debt if you consolidate or use one of these companies.

    Make sure you are taking care of the overall cold and not just drinking the cough medicine.

  4. clint says:

    This is ware just having a plan comes into play. You have talked several times about a set it and forget it plan. if you look at the site http://www.a-debt-free-life.com you will find a really easy way to live a debt free life.

    Thanks trent for all you do to better the lives of lots of people.

    Clint Lawton

  5. Saver Queen says:

    It’s sad that people are being taken advantage of. That’s what really bothers me.

    But I agree, Jason – if you don’t learn to organize your finances yourself, really understand where you’re going wrong and what to do about it, and if are not in the drivers seat when it comes to making financial decisions, you will wind up right back where you started.

  6. L says:

    I found an agency that is affiliated with a respected religious denomination (don’t want to mention it and offend anyone here), thinking that it would be trustworthy. I told my son in law about it, and he used them. He ended up paying them a lot of money for something he could have done himself. I felt badly for recommending them.

  7. JA says:

    What about programs such as this…scram or not?


    “Transforming Debt into Wealth® Deluxe System

    Get completely out of debt (including your home mortgage) in just 5 to 7 years ― and start building real wealth from the first month ― using nothing more than the money you already make!

    BOTTOM LINE — A typical $60,000 annual income household implementing the Transforming Debt into Wealth® program can save more than $150,000 in interest alone…and be able to build more than $3.5 million in their retirement portfolio in the same time they would have just paid off their mortgage the conventional way!

    Even if your credit cards are maxed out and you have a huge mortgage to pay off, you can still get rid of all your debt in about five to seven years, save thousands of dollars of interest ― and begin rapid wealth-building ― without sacrificing the things that matter most to you! This is as close to a financial chain reaction as you’ll ever find. You’ll be amazed how quickly your debts melt away, and how rapidly your net worth climbs!

    In this world-wide best-selling program, you’ll learn now to prioritize and pay off every penny of your debts in the shortest possible time. You’ll discover how to operate 100% on cash…even in emergencies…so you’ll NEVER need to use credit again.”

  8. Eliminate Debt Blog says:

    Whoa that is really scary. They sound so good and in most cases it will work. Your debt can be taken care of much easily but with a cost.

    I’m glad I read these tips and I hope others will realize this too.

  9. Before taking advice from anyone, ask yourself: how do they gain? Then you can know if you can trust them or not.

  10. Bob says:

    I work for a debt collection attorney who collects credit card debt, and the generalities that Trent makes are almost too accurate. I firmly believe that debt consolidation companies take advantage of the vast majority of people who think they are being helped. In my more sinister moments, I like to think about opening my own debt consolidation/management company because with about 4 employees and a minimal licensing fee to the state, you can make some serious money DOING NOTHING. Here’s how it works:

    Most of these companies advertise that they can settle for “pennies on the dollar.” When my coworkers and I hear this, we laugh, because they don’t tell you that it’s usually 100 pennies per dollar. They get you to sign up, which may cost $50-100 to get set up and do your “counseling” where they tell you to not talk to your creditors and to send them the sorry excuse for a Power of Attorney listing the Debt Consolidator as their attorney in fact. Then they collect $50 a month in “management fees” and the debtor pays whatever extra they can to be held “in trust” so that the Debt Consolidator can make settlement offers.

    Meanwhile, you’re missing on payments, creditors mark your account as “cease and desist” (because you’ve notified them that you’re working with a debt consolidator, who may be an attorney and federal law requires no further contact to the debtor) and don’t contact you to work out any arrangements. After about 180 days, the creditor issues the debt to an attorney for collection, who then file suit, obtain a judgment, and garnish assets, employment, tax returns, etc. Meanwhile, interest accrued (probably at the credit card contract’s default rate of 28%) up until suit was filed, then attorneys fees, court costs, and statutory interest accrues after judgment is obtained (dating back to when suit was filed). All of this could have probably been avoided with a $50 payment to the creditor and not the Debt Consolidator. And remember, even though judgments only last for 10 years, renewing the judgment for another 10 is almost as simple as paying $20. Imagine paying on a credit card 19 years after you got sued because it keeps collecting interest and the post-judgment recovery never zeroes out the balance?

    For a Debt Consolidation company, this is great, because all you need are a couple of people to answer phones, a way to merge documents to create the “start-up kit” with names, SSNs, debt information, and the powers of attorney. Then you count the money. If you have 100 customers (a manageable number for a 2 person operation), that’s $5000 a month in straight income. Then you make a few phone calls a day to the creditors, make some lowball offers, get rejected, and then tell your client “well, the creditors are just being unreasonable, but we’ll keep at it.” So long as you don’t have a soul, it would be an outstanding side hustle. Sure, some accounts would settle or set up payment arrangements (which you can fix by having a “No Payment Arrangement Policy”), but most files will just lay dormant.

    This is why a slew of Debt Consolidation companies went out of business in the past few years (Hess-Kennedy being the most recent).

    Sorry for being so cynical, but I have no respect for these Debt Consolidation companies. Granted, Creditors probably aren’t any nicer, but at least they are actually owed the money. Debt Consolidators just smell blood in the water and want to get in on the action.

  11. Noel says:

    We used the Consumer Credit Counseling Services when we got ourselves into trouble. They were very nice people. The helped us set up a budget, to make sure that our repayment plan would work. They were able to get most of our interest payments reduced by double digits. We made one payment a month to them and they disbursed the money. The cost for this service was $2.00 per month. None of our debts were reduced, we paid them all, it took about 5 years. At the end, I was pleasantly surprised to see that we still had a good credit rating. Without this service we would have had to file bankruptcy. We couldn’t even afford to make the minimum payments on all the debt, and with out the interset rate reductions we would have never had them all paid. We simply didn’t have the cash flow. So we’re doing much better now, and managing to pay all of our bills, most of them on time! Some of these services, the not for profit ones are helpful. We wouldn’t have been able to make it out from under without them.

  12. harm says:

    I’m hearing these ads on conservative talk radio.
    I’m pretty conservative myself, and find it amusing
    and distressing both that Rush and the others are
    supported by people who want us to weasel out of
    our debts. Seems like something those doggone
    liberals would do, rotfl

  13. Sometimes people need the extra incentive of working with one of these companies. When I was on welfare with a disabled child, it was so difficult to make ends meet that I ended up with $6K credit card debt over a 4-5 year period (mostly car repairs!). I went through Consumer Credit Counseling – the one that is non-profit and not just in business to scam people – and they only charged me $5/month for the service. It was signing the contract, and making the promise to not open any new credit cards, and cease using the ones I had, that gave me the resolve to make it. I ended up going without a car the last three years because I simply couldn’t afford to pay for repairs. I paid off my debt within 52 months. Then again there are people like my youngest sister, who ran up debt, went through a credit counseling service (not the one I went to) and even while in the program, she’s opened new cards and ran them up again!

  14. harm – I have heard those ads also – the lady talking about “when I first joined the program, all the collection calls and I called xxx and they were so nice and telling me don’t worry”. I think part of the “secrets” are these tips from a site I happened upon the other day. http://tr.im/3bh1 Things like you can tell the collection agencies can’t collect if they don’t have the correct information on your debt, they can’t call before 9am and after 8pm, etc. One of my coworkers is going through a really rough time in her life and I printed these out for her just so she knows she does have some rights, even though she’s in trouble financially.

  15. Michael says:

    I used to work for a company like the one described in the article, and my advise to those who are considering it is: DON’T! Using a debt-settlement or debt elimination program is almost invariably a bad financial decision. The companies do the same thing that any individual can do for themselves; negotiate with your creditors. However, they will charge you hefty fees. You will be far better off negotiating your debts (or better yet, simply paying them) yourself.

    Another HUGE downside to the debt negotiation companies is that if a creditor decides to sue you (in industry slang, the account “goes legal”), the negotiator will leave you high and dry with no representation and no way back from the situation that they have gotten you into. Stay away and do it yourself!

  16. K.D.B. says:

    Interesting…I figured there would be some shady “debt help” folks popping up considering the state of the economy.

    Are there major differences between for profit and non profit groups? I for one am going it alone with my own tightly planned snowball, spending budget, and PF Blog ;-)

  17. Fred says:

    Money IS debt, magically created upon signing of your mortgage, contract or swiping of your plastic.

    Americans ought to pay their debts down, at the individual, company, state and federal level or re-open debtor’s prisons.

    Oh, I forgot, where to put all these morally and financially bankrupt persons when already 25% of the WORLD’s prison population resided in the good ol’USofA…

    The only reason to pay for this kind of service is to educate yourself… And the only way to have the nation back on task is to dismantle the Fed and return to constitutional honest money.

    But, wait – O’Bama’s team has already said it would inflate the dollar to oblivion… no need to rush, you can pay later with devalued federal reserve notes IOUnothings.
    Hang on for dear life to your debt, do whatever it takes to generate the cash flows to service it, it is maybe the only single most valuable vehicle you can find to transfer value towards you.

  18. Sean says:

    One interesting thing to note when suggesting using a non-profit credit counseling service versus a fee based credit counseling service. Often the non-profits are paid, at least partially, by creditors which may result in some deals that are not in the clients best interest.

    For fee services are upfront about what they charge, and in many cases (research this to be careful) don’t get any money from the creditors so will work for the client.

    So, although the for-fee counselor may seem expensive, it may, in the long run, be much better for you.

  19. Jason says:

    I agree very much with the point you raise that assembling your own debt repayment plan, and negotiating for lower interest rates, are great avenues for those that have a large amount of credit card debt. The non-profit credit counseling agencies can be a big help too. I used a mix of both when I paid off over $17,000 in credit card debt in just over 2 years. I was able to rebuild my credit and FICO score quite rapidly as well, since my credit report didn’t get dinged as much as if I were to plead for charge offs with the credit card companies.

  20. Larry says:

    I am personally not a fan of these programs. They are in place to make money from people who have very little go give. I agree with you Trent that most of the stuff they offer can be done on your own. It just takes a little research. Use the library, internet, and resources like Dave Ramsey, Orman.

    If you are really down on your luck in serious debt find someone or organization that has the “heart of a teacher”. Not someplace that is in it for the money.

  21. Erin says:

    On Dave Ramsey’s podcast, I regularly hear people call in who went to debt consolidators, were told that they should send them all their debt payment money and the debt consolidator would negotiate with the creditors and pay the monthly payments for the consumer – and then the consolidator didn’t pay at all or didn’t pay the full amount or didn’t pay on time. So then the people start getting calls from the creditors all over again asking for their money. It sounds like a bad idea to turn over so much control over your finances to these companies.

  22. Simplysara says:

    I used one of these services several years ago. I had just gotten out of a relationship in which I had stupidly allowed control of our finances by the other person and when we broke up I was stuck with $20K in credit card debt in my name. My credit wasn’t horrible at this point, just average. I was so overwhelmed I thought that one of these services could help me. In some ways it did… it brought down my payment amounts but at the same time I ended up with settlements on my credit report.

    The worst part about it was that there was a note on my report about not being able to take out new credit. I had known about that stipulation but had not considered that the rule would apply to more than just credit cards. I had a major dental emergency and I had to borrow from family and friends because I couldn’t get on a payment plan due to the consolidator service. Then I had to move and getting an apartment from any leasing company was impossible because of this same rule. I finally had to get out of the service but the damage had been done to my credit rating.

  23. Aimee Bennett says:

    Consumers should indeed be very cautious with these companies. After all, if you already have money problems, the last thing you need is a “helper” that damages your finances even more.

    If someone is in debt, it is always best to try and take care of it yourself. Many people can learn to systematically pay down their debt, and negotiate better interest rates with their credit card company. But for people in serious debt hardship, the right professional help can be helpful. The key is to understanding the differences in these debt “relief” options.

    Debt consolidation does just that: consolidates your debts so you make one payment per month, which is then split between creditors.

    Debt management plans, offered by credit counseling firms, lower interest rates and extend payments. One of the problems is that the IRS, in a recent multi-year investigation, shut down every one of the credit counseling firms it audited for abuse of non-profit status. Credit counseling firms typically receive their funding from creditors, creating a conflict of interest between consumers and their funders.

    Debt resolution firms negotiate on consumers’ behalf to lower principal balances due. Consumers then pay the debt resolution firm a portion of the savings (consumer gets services, consumer pays for services). Debt resolution can obtain savings of up to half the full amount owed. And yes, they can hurt credit scores. But this option is for someone in serious debt hardship – someone for whom the only other alternative might be bankruptcy. You can rebuild your credit score, but a bankruptcy judgment stays on your record for a very long time.

    With any of these types of companies, people should ask these questions:

    1. Compensation: Does the company get any form of consideration or compensation from creditors?

    2. BBB: Is the company a member of the Better Business Bureau? A “yes” answer means the company is willing to have its practices scrutinized and to respond to consumer complaints.

    3. Individualization: Does the company provide actual consultations and provide advice/education to consumers free of charge? Or is the company simply directing every consumer into a debt management plan?

    4. Free education: Does the company provide educational material, including budgeting and financial advice, free of charge? Many firms consider educational material an additional fee source, not a benefit to their clients.

    5. Background: What is the background of the company’s management team? Look for good, relevant education and experience — not a team that jumps from opportunity to opportunity to make its fortunes.

    6. History: How long has the company been in business?

    7. Success: What are the company’s dropout and success rates? Request these statistics.

    How do I know? I do consulting work with Bills.com, the online portal to a successful, legitimate debt resolution firm.

  24. brooke says:

    I ran up about $6000 worth of credit card debt in college by signing up for those credit cards they offer you on the beach during spring break. I was constantly missing payments and getting late fees. I had too many cards and wasn’t responsible enough to manage them. Seeing I was in trouble, I used one of these services. Although I was paying right around $30 a month to the debt reduction company to handle all of my payments, I was better off because the late fees were even higher than that. Please make note here that I am very aware NOW that I was making fiscally poor choices overall, but my point is that this service was what I needed at the time. Although I could have done it myself, I was too irresponsible to do so, and getting myself on this debt reduction plan was the best thing I could manage. It did mess with my credit, but at 20 years old, I wasn’t trying to buy too much anyway. So all this is to say, there is a place for this type of service out there, it is useful to some people. Probably anyone who is reading this blog is experiencing a fiscal and frugal awakening, and most likely would not benefit from a debt reduction company.

  25. Gus Harber says:

    For some reason I have confidence you are a straight shooter.
    would you mind stating your DOB?
    Can you reccomend a few simple billtracking logs. If they involve Excell include templates as i don’t do Excell though I have it.
    I use a Blackberry Curve and sync it daily ( I am not now a corporate guy)with Outlook2003. It is “fritzy” but reminds me of a woman. Worth the effort.
    I like many I know try to make a simple task complex.
    I especially like your writing style and that you are outspoken (see your comments on “Rich dad, Poor Dad” ) GH at Ottawa, Kansas USA

  26. Michelle says:

    Be aware! Non Profit Debt Counseling is not what it appears. In 2002 we tried it. They charge a monthly fee, not unreasonable BUT. They got most of our credit card interest rates reduced, but, unbeknownst to us until we had a problem with one of the creditors they were paying, did we find out that they also get a kick back from the creditor for making the payments to them, they called it fair (something or other). It turned out that one of the creditors had changed their receiving agent for the payments. The payments never got to them, the prior receiver misplaced the payments for 2 years and of course we were not notified that they were not getting the payments, when I did and annual credit report check is when I found out about the problem. At this point 2 years into the system we were luckily able to get a loan and pay off all the creditors left. But not before it made a bad hit on our credit. So be aware, Debt counseling services are not always what they seem.

  27. On the Money says:

    As someone who worked in Legal Aid (free at source) debt advice for 12 years, I commend you on the quality of this excellent post. Nice one!

  28. gino77 says:

    There are a million and one ways to strategize getting out of debt… And in many cases they are completely personal. I always thought the best method was to seek a councillor from companies such as this one to try and figure out a plan built towards personal needs.

  29. rms says:

    Are you suffering from Debt Stress?
    Repayment Management services work to provide the best, most precise, experienced and clear advice on all debt matters, to do this we need to and aim to identify the clients’ needs and give them best practice advice through fully qualified trained Repayment advisors.

    Are you finding it difficult to make ends meet? Are your monthly outgoings more than your monthly income? Take advantage of our Repayment Management Plan which is designed to put you back in control, isn’t it time you take care of your finances.

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