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

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!