Do you have crippling debt?
Are you thinking about declaring bankruptcy?
Bankruptcy stays on your credit report for 7 to 10 years and has a detrimental effect on your credit score for even longer.
Individuals can file for bankruptcy in two ways—Chapter 7 or Chapter 13. Each method has different qualifications and ramifications. And once someone declares bankruptcy, lenders must stop collecting. Chapter 7 bankruptcy means that all the borrower’s valuable assets are sold and the money gained is used to pay the debt. Chapter 13 prioritizes debts and sets up a 3 to 5 year payment plan.
Bankruptcy doesn’t absolve tax debt, student loans, government fines or alimony and child support.
Considering filing fees, attorney fees, and credit counseling class and credit report costs, bankruptcy typically costs between $1,500 and $4,000, but can also cost more if a case is more complicated.
But, bankruptcy isn’t your only option. Depending on the kind of debt you have, there are three alternatives:
- Tax relief
- Debt consolidation
- Debt settlement
These options help reduce interest rates or the total debt so it is easier to pay off the debt. Here are four things to think about when seeking a debt relief service:
- What kind of debt do you have?
- How much debt do you have?
- How much will it cost?
- What are the characteristics of a reputable, trustworthy company?
What Kind of Debt Do You Have?
There are several kinds of debt:
- Tax debt
- Credit card debt
- Student loans
- Car loans
- Health care services
If your debt is tax-related, it’s best to consult a tax relief company. These companies hire CPAs, tax attorneys and other tax specialists who work to resolve back taxes, tax liens, tax levies and wage garnishments. They negotiate with the IRS to reduce the tax debt, create a payment plan, remove penalties and make appeals.
If your student loans are in default, the IRS can keep some of your tax return to pay off the debts. Depending on your student loan situation, a tax relief company may also be a good resource for resolving this kind of debt.
Other kinds of debt are best handled by a debt relief company. Most debt relief companies specialize in either debt consolidation or debt settlement.
Debt consolidation takes all debt from different sources and puts them under one loan. The goal is for the consolidated or refinanced loan to have a lower overall interest rate that is easier to pay off.
However, qualifying for a loan can be tricky if your credit score isn’t great.
If you can’t qualify for a loan, debt consolidation companies can be extremely helpful. These companies set-up a debt management program for their clients. The company negotiates with each creditor to reduce the interest rate.
The debt management program involves a set monthly payment, generally lower than your combined monthly payments. You pay the debt consolidation company one payment. The company then distributes this payment to your creditors.
Interest rates offered by consolidation companies can range between 0 and 17%. When choosing a debt consolidation company, find the one that offers you the lowest interest rate.
Debt settlement is like declaring bankruptcy without having to file for bankruptcy. Because debt settlement sidesteps filing for bankruptcy, it’s a riskier and more complex process.
The first step is for people to stop making payments on their loans, which has a significant negative effect on their credit scores. Then, the debt settlement company steps in to negotiate the debt down. Some companies can reduce the total debt amount by 50%. However, some creditors won’t negotiate with a debt relief company.
Depending on how severe your debt is, the process may be worth it in the end. There are ways to mitigate the effects of debt settlement on your credit report. It’s also important to be aware that the government considers the amount deducted from your debts as taxable income.
How Much Debt Do You Have?
Tax relief companies generally have a minimum debt requirement of between $5,000 and $10,000. Debt settlement companies have similar minimum debt requirements, though there are a few companies with lower and higher minimum debt requirements. In contrast, debt consolidation companies don’t have minimum debt requirements, so they’re an especially good fit for people with lower amounts of debt.
How Much Will It Cost?
Debt settlement, debt consolidation and tax relief companies all have different ways of calculating the cost of their services.
Tax Relief Costs
The average cost of tax relief services fallsbetween $1,500 and $4,500. The cost varies based on each customer’s tax situation and the types of services required. Tax relief costs generally start anywhere from $250 to $999 depending on the company. For example, Tax Defense Network has a minimum debt requirement of $5,000 and costs $2,500 to $3,000 on average.
In contrast, Community Tax has a $7,000 minimum debt requirement and costs generally range between $2,500 and $4,500.
Debt Consolidation Costs
Debt consolidation companies typically charge a monthly fee and some upfront setup costs. Monthly costs can range between $0 to $69, depending on the company and the client’s financial situation. Setup costs typically range between $0 and $100, depending on the company and the client’s financial situation. For example, Consolidated Credit’s monthly costs can be up to $69 with a setup fee between $0 and $49 dollars. Negotiated interest rates vary.
In contrast, DebtGuru’s monthly costs fall between $15 and $39 with no setup fee. Interest rates typically fall between 0 and 15%. It has a minimum debt requirement of $10,000.
Debt Settlement Costs
Debt settlement companies set their fees to a certain percentage of the borrower’s debt. The fees typically range between 15 and 25% of the total debt, though there are a few companies that charge less than 10%. For example, Freedom Debt Relief has a $7,500 minimum debt requirement and its fees range from 15% to 25% of the debt depending on the client’s state of residency. Pacific Debt Inc has a $7,500 minimum debt requirement and charges 15 to 25% of the total debt.
While these costs are high, for consumers with about $20,000 or less in debt, debt settlement may be cheaper than bankruptcy.
What Are the Characteristics of a Reputable Company?
Companies that provide debt relief can be either great or terrible. Before you commit and find yourself the victim of a financial scheme, it’s important to do your research.
Make sure that the company you choose hires qualified consultants. Some of the best tax relief companies have tax lawyers, Certified Public Accountants (CPAs) and even former IRS employees on staff. Debt relief companies should have their consultants trained and certified in credit counseling or debt settlement, depending on the company’s specialty.
The International Association of Professional Debt Arbitrators (IAPDA) and National Association of Certified Credit Counselors (NACCC) provide training and certification for debt relief specialists. The American Fair Credit Council (AFCC) also audits and monitors companies to ensure that industry standards are met and consumers are protected. In general, companies with an AFCC certification are trustworthy.
Other agencies that provide training, certification or accreditation include the following
- Financial Counseling Association of America (FCAA)
- International Standardization Organization (ISO)
- National Foundation for Credit Counseling (NFCC)
As an added check, consider talking with your state’s attorney general or a consumer protection agency to verify that any company you work with has the necessary licenses required by your state of residence.
Free Consultations and Payment Plans
In general, if it sounds too good to be true, it probably is. Choose companies that offer free consultations and discuss realistic options for resolving your debt. Reputable companies are professional and generally won’t reach out to debtors to find clients.
Companies that are clear about the costs of their services and fees are typically more reliable than companies that aren’t. Make sure the company you choose follows the industry standards for payments. For example, debt consolidation companies generally have monthly fees and may charge a setup fee.
Tax relief and debt settlement companies should only require payment once the debts have been reduced. Consumers should also carefully consider the terms of money-back guarantees when having to provide some sort of payment upfront.
Both the tax relief and debt relief industries are regulated by the Federal Trade Commission (FTC). Going into your free consultation, you should be aware of what solutions are available to people in your situation.
If the solutions offered during the consultation don’t match with FTC standards, then another company is a better choice. The two primary ways to resolve tax debt are through installment agreements and offers in compromise. If these are the main suggestions offered by your tax relief consultant, that’s a good sign.
Customer reviews can help you gauge the level of satisfaction past customers have had with specific companies. Be wary of review sites that don’t verify the reviews because some companies pay for fake positive reviews. Look for websites with lots of reviews and a variety of star ratings coming from those reviews.
Lawsuits and Complaints
It’s also a good idea to check to see if the company has had lawsuits, especially recent ones. A history of lawsuits can cue you into past challenges and mistakes a company has made, which can help you avoid bad companies and have a better sense of what red flags to look for. When considering a tax relief company, consumers should check to see what complaints have been filed with the IRS and FTC. A history of complaints shows that a company isn’t very trustworthy.
Weighing all of these factors will help you determine which companies are reputable and which companies are scams. Knowing your options can help you make the best choice for your situation. So, take the initiative to consult with credit counselors, understand your debt, take control and be empowered. And then live happily ever after, debt-free.
About the Author
Alice Stevens of loves learning languages and traveling. She currently manages debt and tax relief, life and health insurance, and car warranty content for BestCompany.com.