Negotiating with your creditors can be an excellent way to reduce the overall amount you owe, increase the period you repay your debts, or lower your interest rates. But getting free or low-cost assistance can be tricky. Knowing where to start is often difficult, and scammers might offer to "help" you.
To get free or low-cost help in dealing with your creditors, you might consider dealing with a local legal aid program or clinic, or working with a credit counseling agency. But as you explore these options, be sure to avoid debt management and debt settlement scams.
Which Free Debt Help Option is Right for You?
Your best options for finding free or low-cost debt assistance are legal aid programs (which offer free or low-cost legal representation, budgeting advice, and self-help materials to low-income individuals) or legitimate nonprofit credit counseling agencies that help manage unsecured debts like credit cards and medical bills, sometimes through debt management plans. (Debt management plans have some drawbacks compared to filing for bankruptcy. There's more on this topic below, and a credit counseling agency can also advise you about which option might be best in your circumstances.)
Before enrolling in any program, explore all options, including handling negotiations on your own. Also, you need to watch out for scams. For-profit debt relief scammers charge excessive upfront fees (illegal under federal law), pressure you to stop paying creditors, and often leave you worse off.
Getting Help From Legal Aid Programs and Clinics
Legal aid programs and clinics, which are often staffed by pro bono (volunteer) attorneys, offer legal assistance to low-income individuals and families.
What Legal Aid Programs Offer
Legal aid programs typically provide:
- attorney representation in some individual cases
- do-it-yourself advice on a variety of issues, like how to negotiate settlements with your creditors or help in working out a debt repayment plan, and
- self-help materials, usually delivered in workshops, over helplines, or online.
How to Find and Qualify for Legal Aid
If you meet certain criteria (such as having limited income), legal aid offices and legal clinics often offer their services for free. You can find a list of various legal aid programs on the Legal Services Corporation's website.
Working With a Consumer Credit Counseling Agency
Legitimate consumer credit counseling agencies, which you shouldn’t confuse with debt settlement companies or scammer debt management companies, are nonprofit organizations that offer help in managing unsecured debts, like credit card and medical debts.
What Credit Counseling Agencies Do
Through a credit counseling agency, your consumer credit counselor can:
- go over your current financial situation
- help you come up with a budget that manages your finances, and
- in some cases, develop a personalized plan (called a "debt management plan") to deal with your debts, though the agency will likely charge a fee for this service. Credit counseling agencies might charge a low fee or agree to waive their fee if you can't afford it.
Understanding Debt Management Plans (DMPs)
A "debt management plan" is a way to pay down outstanding debt by making a single monthly payment to the credit counseling agency, which will then be distributed to your creditors.
How debt management plans work. Usually, consumers make regular scheduled payments into the account for three to five years, depending on their debts and income. In most cases, the credit counselor won't negotiate a reduction in the amounts you owe, but will lower the overall monthly amount you pay by getting the creditors to:
- increase the period over which you repay the debt
- waive fees, and
- reduce your interest rates.
The credit counselor will also try to get the creditors to agree not to pursue collection efforts or charge late fees or penalties, so long as you are in the debt management program.
What debts can I pay off with a debt management plan? Non-priority, unsecured debts, like credit cards, store cards, medical debt, and personal loans, can generally be included in a debt management plan. You can’t, however, include mortgage or rent payments, car loans, or federal student loans.
How much does a debt management plan cost? You must pay the debt management company a fee on top of monthly deposits. The cost of this kind of service varies from agency to agency and according to state law. You’ll probably have to pay an enrollment fee of $75 or less, plus a monthly fee of around $20 to $50. Some states don’t permit these charges. The fee might be paid by the creditors participating in the plan (who pay the agency a small percentage of the money you pay under the plan), or the agency might charge you a fee, often called a "contribution" or "donation." Many legitimate consumer credit counseling agencies provide free services or charge fees based on a sliding scale, depending on income.
Consider other options. Generally, if most of your debt is unsecured (say you have significant credit card debt), and you’re struggling to make multiple, large monthly payments, you might benefit from a debt management plan. But you might benefit even more from filing for bankruptcy or pursuing another option, like debt settlement or negotiating on your own. Be sure to explore all options before signing up for a debt management program. Also, be cautious. Scams are common in the debt management business.
Comparing Your Options: Debt Management Plan vs. Bankruptcy
Enrolling in a debt management program is similar to filing for Chapter 13 bankruptcy. Both require a three- to five-year plan. One advantage to a debt management plan is that you won’t have a bankruptcy in your credit history. But a Chapter 13 bankruptcy has two main advantages over a debt management plan:
- If you miss a payment, Chapter 13 protects you from creditors who could otherwise start collection actions immediately. Debt management programs don’t provide this protection. Also, any creditor can refuse to participate in a debt management plan.
- Debt management plans usually require you to pay your debt in full, sometimes excluding late fees. In a Chapter 13 bankruptcy, the amount you have to pay depends on your disposable income and your nonexempt property’s value. You might only have to pay a small percentage of your unsecured debt. Or you might pay nothing at all. Or you might qualify for a Chapter 7 bankruptcy.
Because certain creditors, like credit card companies and department stores, often fund nonprofit credit counseling agencies, a credit counseling agency might try to talk you into a debt management plan. That way, you’ll repay your debts in full rather than getting relief in bankruptcy. It’s a good idea to speak to a bankruptcy lawyer to make sure you get the complete picture before signing up for a debt management plan.
How to Protect Yourself: Spotting Debt Relief Scams
While many credit counseling agencies are dedicated to helping consumers resolve their money troubles, some companies (often called "debt settlement companies" or "debt settlement services") charge excessive fees, give bad advice, or don’t perform the services they promise.
You won’t get free or low-cost help from a debt settlement company. Debt settlement firms, unlike some consumer credit counseling agencies, are for-profit companies.
How Debt Settlement Companies Work
A debt settlement company will likely tell you to stop making payments to your creditors. They'll tell you to make the payments to them instead while your debts are being negotiated. The monthly payments you send to the debt settlement company cover the following:
- the hefty fee for the debt negotiation services, and
- your savings, which are set aside for future settlements of your debts as negotiated by the debt settlement company.
The debt settlement company might also charge a contingency fee, a percentage based on any amounts saved through settlement.
Red Flags: Signs of a Scam Debt Settlement Company
If a debt settlement company makes any of the following claims, it’s most likely a scammer.
- The company guarantees your unsecured debts will be paid off at less than half their value.
- The company charges large monthly service fees.
- The company insists that communications to your creditors go through them and won’t allow you to make direct payments to your creditors.
- The company assures you that you won't face creditor lawsuits.
- The company tells you its services will improve or have no negative impact on your credit reports.
- The company claims it can remove negative information from your credit reports, even if the information in the reports is accurate.
Other Red Flags and Warning Signs
If an organization that you’re considering using to help you deal with your debts does any of the following things, you should find another agency:
- It pushes a debt management plan as your only option before taking the time to analyze your financial situation fully. While debt management plans work well for some people, they're not appropriate for everyone. You might also consider filing for bankruptcy or trying to settle your debts.
- It charges you a fee for educational materials.
- It requires you to give details about your situation before it will tell you about the company and the services it provides.
- It refuses to help you if you can’t afford to pay for its services.
Avoid Getting Scammed
A debt settlement company might charge high fees for services you could do yourself, drop the ball when it comes to negotiating with your creditors, or simply take off with your money. During the time it takes the debt settlement company to work with your creditors—or for you to figure out you’ve been scammed—you could get hit with late fees and penalty interest charges on your debts.
Even if the debt settlement company manages to settle one or more of your debts, you might end up with more debt than you had initially. Besides, creditors and debt collectors often refuse to negotiate with debt settlement companies. They might even step up their efforts to collect from you by filing a lawsuit, for example.
In almost all cases, you’re better off negotiating on your own and using the money you would have paid to the debt settlement company to make payments to your creditors or hire legitimate help.
How to Find a Legitimate Credit Counseling Agency
To locate a legitimate credit counseling organization:
- Make sure the company is accredited, usually by the Council on Accreditation (COA) or the International Organization for Standardization (ISO).
- Consider using a Consumer Credit Counseling Service (CCCS) agency, which is a member of the National Foundation for Credit Counseling (NFCC) and is accredited by the COA.
- Ask whether the counselors working for the agency are certified by an independent agency, which means they’ve passed a certification exam that tests for understanding in areas like counseling, budgeting, credit, and consumer law, debt management, and bankruptcy.
- Take a look online to see if past customers have filed complaints against the company with your state attorney general’s office, the Better Business Bureau, and local consumer protection agencies.
The Bottom Line
Working with a free legal aid program (if you qualify) or a reputable, low-cost consumer credit counseling organization are two practical options for dealing with your debt. But some companies are best avoided. Keep in mind that you can work directly with your creditors on your own for free.
If you don’t qualify for a legal aid program or prefer that an attorney work with your creditors on your behalf, consider hiring a debt settlement lawyer. If you have a lot of debts you can't pay, you might want to consider filing for bankruptcy. In that situation, you'll want to talk to a bankruptcy lawyer.