What is a debt relief program and how do I know if I should use one?

Debt relief or settlement companies are companies that say they can renegotiate, settle, or in some way change the terms of a person's debt to a creditor or debt collector. Dealing with these companies can be risky.

Debt settlement companies, also sometimes called "debt relief" or "debt adjusting" companies, often claim they can negotiate with your creditors to reduce the amount you owe. Consider all of your options, including working with a nonprofit credit counselor and negotiating directly with the creditor or debt collector yourself. Before agreeing to work with a debt settlement company, there are risks that you should consider:

• Debt settlement companies often charge expensive fees.
• Debt settlement companies typically encourage you to stop paying your credit card bills. If you stop paying your bills, you will usually incur late fees, penalty interest and other charges, and creditors will likely step up their collection efforts against you.
• Some of your creditors may refuse to work with the company you choose.
• In many cases, the debt settlement company will be unable to settle all of your debts.
• If you do business with a debt settlement company, the company may tell you to put money in a dedicated bank account, which will be managed by a third party. You might be charged fees for using this account.
• Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you.
• Unless the debt settlement company settles all or most of your debts, the built-up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.
• Using debt settlement services can have a negative impact on your credit scores and your ability to get credit in the future.

Warning: Debt settlement may well leave you deeper in debt than you were when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and in order to collect the funds required for a settlement. This can have a negative effect on your credit score and may result in the creditor or debt collector filing a lawsuit while you are collecting funds required for a settlement. And if you stop making payments on a credit card, late fees and interest will be added to the debt each month. If you exceed your credit limit, additional fees and charges may apply. This can cause your original debt to increase.

Avoid doing business with any company that promises to settle your debt if the company:

• Charges any fees before it settles your debts;
• Represents that it can settle all of your debt for a promised percentage reduction;
• Touts a "new government program" to bail out personal credit card debt;
• Guarantees it can make your debt go away;
• Tells you to stop communicating with your creditors;
• Tells you it can stop all debt collection calls and lawsuits; or
• Guarantees that your unsecured debts can be paid off for pennies on the dollar.

An alternative to a debt settlement company is a non-profit consumer credit counseling service. These non-profits can attempt to work with you and your creditors to develop a debt management plan that you can afford, and that can help get you out of debt. They usually will also help you develop a budget and provide other financial counseling.

Also, you may want to consider consulting a bankruptcy attorney, who may be able to provide you with your options under the law. Some bankruptcy attorneys will speak to you initially free of charge.

Warning: There could be tax consequences for debt forgiveness. If a portion of your debt is forgiven by the creditor, it could be counted as taxable income on your federal income taxes. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax.

For servicemembers with loans taken out before entering active duty military service, the Servicemembers Civil Relief Act (SCRA) provides a variety of protections, including an interest rate reduction down to 6 percent and foreclosure protections. Download our fact sheet

If you are on active duty when you refinance or consolidate your loans, the new loan will not be covered under the protections of the SCRA since it is no longer considered a pre-service loan. For example, if you took out a student loan before you entered active duty, but then consolidate that student loan after entering active duty, you would not then be able to request an interest rate reduction down to 6 percent on that new consolidation loan. Or, if you took out a mortgage before you entered active duty, and refinance during active duty, you would lose the foreclosure protections provided under the SCRA.

If you still have questions about your rights under the SCRA, contact your closest legal assistance (JAG) office

for more information. You also may be able to get assistance from your state attorney general