Are Debt Relief Agencies Helpful? Part 2

By MMBB Financial Planning Specialist Tyler Howard, CFP® 

Last month, we shared what debt management agencies are, what they do and the pros and cons of using them. In part 2 of our series, we explore how to choose a debt management company, red flags to watch for and when it makes the most sense to enlist these agencies.

Maria sat at her kitchen table scrolling through overdue bills and reminder emails she had flagged for later. Credit cards, medical expenses from an unexpected surgery, and a high interest store card had piled up faster than she imagined. For months, she juggled payments and shifted balances, telling herself things would soon settle down. Now even minimum payments felt impossible. Her credit score suffered, and stress disrupted her sleep, mood, and work. Desperate for relief, Maria called a debt relief agency. The representative promised major reductions in her debt but offered vague answers about fees, leaving her unsure whether using the agency was a financial mistake or good solution for her.

Is It Worth It?

A debt relief program may be worth consideration if you have large unsecured debt such as credit cards or medical bills, can’t make the monthly payments and a financial professional has suggested such a program. It may also be a reasonable option if you lose your job or have limited assets and can’t qualify for a consolidation loan.

It is not worth using a debt relief company if you can still make minimum payments or if the debt is small enough that you can negotiate yourself. If you plan on buying a home or a car in the near future, you probably do not want to work with a debt relief agency as it most likely will have a negative impact on your credit score. Ultimately, the decision to use a debt relief program is one you should discuss with a financial professional first. 

DIY Alternatives

If you choose not to go with an agency, there are ways to manage debt yourself. Here are some tactics you can use: 

• Negotiate with creditors. You do not need a third party to do so. 
• Consider a debt consolidation loan. Debt consolidation loans have a fixed interest rate and a set repayment term, typically ranging from two to five years.
• Consult a financial advisor or a credit counselor. They can help you choose a payoff strategy, such as the debt snowball method or debt avalanche method. 

How to Choose a Reputable Agency 

Debt settlement companies differ in their terms, plans, requirements and even legitimacy. Consider these factors when choosing a company. 

1. The agency should be accredited by the American Association for Debt Resolution and the counselors certified by the International Association of Professional Debt Arbitrators. 
   
   
2. Ask if the counselors work on commission. If the answer is yes that person may actually be a salesperson and not a credit counselor. 
   
   
3. Compare fees. A debt relief company can’t legally ask for upfront payment. Ask for a breakdown of anticipated costs and fees before signing the dotted line. 
   
   
4. Read the agency’s reviews, both the complaints and the success stories, to understand typical client experiences. 
   
   
5. Check the Federal Trade Commission’s (FTC) database of banned debt relief companies that are essentially prohibited from offering debt settlement services.

Beware of Red Flags When Choosing a Debt Relief Company

If you decide to go with a debt relief agency, there are a few factors to consider when determining if an agency is legitimate or a scam. Watch for these signs, which may indicate the company is not reputable. 

• Companies reaching out to you unsolicited. 
• Offer “special” ways to settle debt. 
• Guarantee results, especially if this promise comes before reviewing your documents. 
• Promises of “total” debt forgiveness. 
• Tell you to ignore creditors. Legitimate programs work with you and your creditors to find a manageable solution.
• Claims of government affiliation. 

Maria eventually realized that debt relief agencies weren’t inherently “bad,” but they weren’t a magic solution either. After speaking with a nonprofit credit counselor, she decided the do-it-yourself debt management approach was the best fit for her. For the first time in months, she felt she was moving forward with a plan she understood and trusted.