Frequently Asked Questions - What Are Debt Relief?
Debt relief is designed for a debtor who owes a creditor, but the debtor has trouble paying the debt in full. A debt occurs when a borrower agrees to pay the lender the original sum borrowed, plus interest. A high debt to income ratio requires debt relief to lessen the strain one has on their finances.
Debt management plans and debt consolidation are two popular methods of debt relief. A company offering debt relief works as a mediator between the debtor and the creditor. The creditor may charge-off the debt to a collection agency. It is the responsibility of the mediator to speak with the creditor holding the debt.
History of Debt Relief
Debt relief may have a new name, but the concept has existed for thousands of years. According to the debt settlement wiki, the late 1980s sparked an increase in debt settlement options. The 21st century has created an increase in debt, and therefore a need for more debt relief programs. In 2019, debt in USA homes totaled $5 trillion. By 2021, it increased to $12.5 trillion according to the New York Federal Reserve.
What is Credit Counseling?
Credit Counseling provides a budget for consumers who are unable to create their debt relief. Counseling services are provided in two forms: the government or private organizations. Government organizations are non-profit locations in cities and towns around the United States. They have government funds to provide free counseling. It is a voluntary program. Universities, US Cooperative Services, military, credit unions, and housing authorities offer debt counseling. Private debt counseling requires fees. Both types of credit counseling provide advice, seminars, personalized services, and educational materials.
What Are Debt Management Plans?
Debt Management Plans (DMP) refers to a program set up to help consumers pay their debts through a credit counseling agency. The agency will work with the consumer as a mediator to discuss debt resolutions with creditors. DMPs may be sought through independent debt relief services
CuraDebt is a debt service that provides debt management plans. As an example of debt relief programs, the company employs trained agents that mediate with creditors and provide counseling and budget services. There are many types of programs out there for debt management plans in which a payment program is structured to pay down the debt in as little time as possible. It is not debt consolidation or debt settlement.
What is Debt Settlement?
Debt settlement should not be confused with debt counseling or debt management plans. It is a different type of debt relief. Debt settlement “charge-offs” settle the debt in one payment, in which part of the debt is forgiven. A settlement plan can be risky, have a negative long term impact, and affect a consumer’s ability to obtain credit in the future. Debt settlement can be in the form of debt consolidation.
This program requires the debt settlement firm to contact the creditor to arrange a payoff where the debt consolidation firm takes over the debt at a discounted rate and then requires payments from the lender to come to them.
A fee can only be charged for debt relief programs once the debt has been settled or reduced. Any debt settlement company is prohibited from charging fees for services upfront as part of the FTC amendments made to the Telemarketing Sales Rule.
Under Federal law, a debt relief program must provide clear explanations of terms, prices, and results. The company must explain any money or percentage of the outstanding debt a consumer may save or be liable for during the process of debt settlement or other debt relief programs. If non-payments are requested by the relief program mediator all consequences must be disclosed to the exact understanding of the consumer to avoid any miscommunication.
The government can tax savings found with debt relief programs. It is, in certain situations, considered income and therefore taxable. Credit card companies and other creditors may report to the IRS regarding settled accounts. Insolvency is one way to avoid tax consequences.
Debt Relief Fraud
The Federal Trade Commission has sued debt relief companies offering debt relief programs over the last couple of years. The FTC and IRS have investigated and found some debt relief programs to be fraudulent. Over 12 companies have been sued and at least half a dozen are still under review.
The IRS announced certain companies and law firms around the country offered debt relief scams on IRS taxes. Consumers are told, for an upfront fee, the company can provide tax relief regarding any savings made on the debt.
Other debt relief scams have involved upfront payments and debt consolidation or debt settlement. A company will promise to reduce the payments by 50 to 70 percent. In a month or two, the creditors are calling debtors asking why they stopped payments and telling the consumer their loan is going to collections. The consumer is unaware of nonpayment believing the debt has been resolved.
Protection from debt relief is possible if the consumer researches the available debt relief programs and seeks government-sanctioned assistance programs. Reviews can be used as one method of researching available debt relief programs.
Debt relief companies that ask for the following:
Pressures consumers to make a contribution
Guarantees all unsecured debt will disappear
Stops communicating with the creditor and/or debtor
Tells a consumer to stop making payments
is usually an organization running a debt relief scam. Recognizing a scam or fraud is the main line of protection a consumer can have against fraud. Seeking a government-backed organization or one with a Better Business Bureau (BBB) rating provides further protection against scams.
Claims may be filed should a consumer feel wronged. Claims must be filed through the police to establish a foundation for a court proceeding against the company.
Payment Protection Insurance (PPI) was created to help people pay their monthly payments on loans, mortgages, credit or store cards if they become ill or lose their job. You are not obligated to take out PPI, however, it has been mis-sold to many people; through selling to people who were not eligible for it, were told it was compulsory or the cover not being fully explained. These people are now eligible for compensation. Many websites, such as Consumer Finance help people recover the full cost of their PPI.