Even in good times, millions of Americans are saddled with excessive debt. As the COVID-19 pandemic continues to damage the economy, the number of people unable to handle the problem themselves is growing.

Help is available. In fact, an online search for “debt relief” shows about 300 million results in four major categories: debt management, debt settlement, consolidation loans, and bankruptcy attorneys.

Some are good choices; others could make your financial situation worse.

To help you choose wisely, Checkbook spoke with consumer advocates who deal with debt relief. They all agree: Your first stop should be a non-profit credit counseling agency.

Non-profit Credit Counseling

A trained counselor will look at your overall finances and suggest the most affordable pathway to repayment. Your options would typically include:

  • Do-it-yourself by making a budget, cutting back on spending, and talking to your creditors about a lower interest rate.
  • Signing up for a debt management program offered by the credit counseling agency that enables you to affordably pay-off your debt in full.
  • Talk to a lawyer about bankruptcy.

This is individualized advice based on your specific situation: income, monthly expenses, and total debt. This service is not limited to credit cards. Your counselor can also provide guidance for other debt, such as auto loans, student loans, and home mortgage, and can help you develop financial habits that will benefit you in the future.

With a debt management program, your credit cards are canceled, and you agree to pay back all of what you owe, but the agency will negotiate with your creditors to lighten the load.

“We work on reducing the interest rates, stopping any late fees that might be accruing, and bringing those accounts back to a current standing, so they're not showing as past due on their credit report,” said Becky House, with American Financial Solutions. “So now, the payments the client is making are actually going towards paying down the debt, rather than just paying huge amounts of interest.”

It’s not always easy, and it will take time—typically three to five years—but if you’re committed to a brighter financial future, it can be done.

Victoria Garcia and Jeff Milligan were able to pay off $45,000 in credit card debt in just three years after signing up for a debt management plan with GreenPath Financial Wellness. The Denver couple made their final payment a few weeks ago.

“It still feels a bit surreal; we’ve been struggling for so long that mentally it hasn’t quite hit me yet,” Garcia told Checkbook.

Garcia and Milligan over-extended themselves in 2016 when they decided to invest in their financial future. He took a real estate course; she learned about running an online business. They paid for those courses with credit cards.

While they had some success, their incomes didn’t improve as quickly as they expected, and within a year they were unable to pay their credit card bills or their mortgage.

“I remember how awful it felt to be constantly getting calls from the credit card companies. It was very, very, very, very stressful,” Garcia said.

Their credit scores tanked, so Milligan couldn’t refinance his car when the lease ended. Then they received a pre-foreclosure letter from their bank.

“We had a heart-to-heart with ourselves and realized that we were past the point of no return, and it was time to suck it up, admit the truth, and get some help,” Milligan told Checkbook.

The couple said their counselor was friendly, approachable and non-judgmental about their debt.

Milligan’s credit score, which dropped from around 810 to 419 when he stopped paying his credit card bills, is now back to around 717. Garcia’s credit score is also good again. The couple refinanced their mortgage and built a $20,000 emergency fund.

Victoria and Jeff are sharing their success story on their website to show others who are struggling with debt that there is a way out.

You can find a non-profit credit counselor in your area by visiting the National Foundation for Credit Counseling (NFCC) website. Counselors can also help with mortgage problems and student loan debt. The initial consultation is free and the monthly fee, if you choose a debt management plan, is typically $25-$50 based on your ability to pay. (In some states, these fees are not allowed.)

More Info: The NFCC has a video series that explains how credit counseling works.

Debt Consolidation Loans

It may be cheaper and faster to pay off multiple debts all at once by taking out a personal loan at a lower interest rate. Focusing on one payment that’s the same amount each month is easier for some people. Making those loan payments on time each month should improve your credit score.

Of course, you’ll need good credit to get good terms on a new loan, and that’s not always the case, especially if you have maxed out your cards and fallen behind on your payments.

“The last thing you want to do is to borrow your way out of debt, especially if it's going to add expenses to what you're already having difficulty managing,” cautioned Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. “If you're already having trouble managing debt because of cash flow or a shortage of income, a consolidation loan may give you a little bit of a temporary reprieve, but not long-term relief. And that's why it's important to get budget counseling and financial coaching to help you through some of the bigger obstacles that are leading to this difficulty managing debt.”

Should you decide to go this route, shop around for the best deal from a trusted financial institution. Typically, you’ll get the best rate at a credit union. Compare both interest rates and fees.

Caution: Skip online offers for interest rates that are too-good-to-be-true rates—it could be a scam. And be cautious of companies that specialize in debt consolidation loans (including some debt settlement companies) because their interest rates are often sky-high.

Debt Settlement

With this approach you negotiate with your creditors to pay less than you owe. While you can do it yourself, many people hire a for-profit debt settlement company to do the heavy lifting for them. The promise of being “debt free in just 24-48 months” and only paying “a fraction of what you owe,” is mighty appealing.

But consumer groups, including Checkbook, consider debt settlement companies predatory and a waste of money. Their customers often end up in worse financial shape than when they started.

Hire a professional debt settlement company and instead of making payments to the credit card company, you’ll deposit your money in a bank account set up by the settlement firm.
The firm then negotiates with your credit card issuers, typically by trying to convince them that getting paid part of the debt is better than continuing to get nothing.

This game of financial chicken could take years—with no guarantee of success. During that time, interest and penalty fees continue accruing. So, you’ll end up deeper in debt and farther behind on payments, should the creditor refuse to negotiate, and many will not.

If the creditor does agree to settle, and you accept the offer, you’re charged a fee (typically 18-25 percent) by the debt settlement company on that payoff amount.

Caution: FTC regulations prohibit debt settlement companies from charging advance fees. The customer only pays if a settlement is negotiated with the lender and they accept the offer. Anyone asking for money upfront is scamming you.

Debt settlement will have a negative effect on your credit history. The notation, “account closed, but not paid in full,” will be in your credit file for seven years.

“These companies make big promises, but very few people get real relief,” said Andrew Pizor, staff attorney with the non-profit National Consumer Law Center. “Most people who are paying for their settlement end up dropping out because it takes a long time to save up the money, you still get all of the collection calls, and you can still get sued which could result in garnishing of your wages or placing a lien on your house.”

Note: In most cases, the IRS considers debt forgiveness taxable income. So, if you owe $10,000 and the lender settles for $6,000, that $4,000 will be reported to the IRS and is likely taxable.

Veronica, who lives in Minnesota, dropped out of a debt settlement program that wasn’t delivering the promised results. She was struggling when she signed up, but still making payments.

Veronica told Checkbook that after she stopped paying her bills, as the debt settlement firm required, it “destroyed” her credit, and the phone started “blowing up” with constant calls from debt collectors.

Now, she’s working with a non-profit credit counselor, paying off her credit card balances and rebuilding her credit.

Caution: Some debt settlement companies want you to give them power of attorney over your account so they can make decisions without your permission. DO NOT agree to this.

The debt settlement industry insists it helps people and provides a good alternative to bankruptcy, but the American Fair Credit Council (AFCC), which represents 80 percent of the industry, declined Checkbook’s request for an interview. Instead, the council sent this statement from AFCC president Robby H. Birnbaum:

“American Fair Credit Council (AFCC) members provide a valuable service to millions of Americans facing financial hardship. When families find themselves confronted by some of the most dire financial circumstances, debt settlement offers a federally regulated solution that saves Americans more than $1.5 billion annually. Moreover, on average, a recent Harvard study determined that debt settlement saves consumers $2.64 for every $1 in fees paid. By partnering directly with their customers—ensuring, under federal law, that no one pays any fees until they agree to and make a payment towards a settled debt—and working with their creditors, AFCC members put the interests of their clients first.”

During a congressional hearing in July, Kathleen Kraninger, director of the Consumer Financial Protection Bureau (CFPB), told lawmakers: “There are many concerning practices in the debt settlement space, there’s no doubt.”

In 2019, the CFPB sued Freedom Debt Relief, LLC (the largest debt-settlement company in the U.S.) for a list of alleged violations that included: charging advance fees, providing misleading information about its fees, and charging clients without settling their debts as promised. The company settled the lawsuit, agreeing to pay $20 million in restitution to affected customers and a $5 million civil penalty.

Bankruptcy Protection

When all else fails, personal bankruptcy is your last-resort legal option. It’s designed to provide a clean slate for those who qualify. It erases unsecured debts, and stops wage garnishment, foreclosures, and debt collection.

Bankruptcy has long-term financial implications—potential creditors will see that noted in your credit file for years to come—so it’s best to work with a qualified attorney.

There are two types of consumer bankruptcy:

  • Chapter 13: You pay off your debt in full following a repayment plan approved by the court and administered by a trustee. This typically takes three to five years. A Chapter 13 bankruptcy remains on your credit report for seven years from the filing date.
  • Chapter 7: You don’t pay anything. The court-appointed trustee liquidates your non-exempt assets (cars, work-related tools, and household furnishing are typically exempt) to pay the debt. If there’s any remaining debt, it’s discharged. To file Chapter 7 bankruptcy, you must pass a “means test” based on your income and expenses. If approved by the court, this process should be completed in about four months. A Chapter 7 bankruptcy remains on your credit report for 10 years.

“There’s absolutely nothing to be ashamed about; corporations file for bankruptcy all the time,” said Kiran Sidhu, policy counsel with the non-profit Center for Responsible Lending. “There is an understanding implicit in the law that there are going to be times when people are in over their heads, and they have to have a fresh start.”

If done correctly, and with sound advice from a qualified attorney, “bankruptcy can be a much better option than going to a debt settlement company,” Sidhu told Checkbook.

Filing fees are typically several hundred dollars. This is on top of what the lawyer charges.

Avoid the Scams

Fraudsters always try to take advantage of people when they’re desperate. Here are some warning signs that you’re dealing with scammer:

  • An unsolicited call or email offering debt relief, often involving “a new government” or “COVID-relief” program.
  • A “guarantee” to make your debt go away.
  • The company won’t send you any information and doesn’t explain the potential negative consequences of the program.
  • You’re required to pay upfront before you get any help. Again, that’s illegal.


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    Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.