10 Questions to Ask Before You Sign Up for Debt Relief

Signing up for debt relief is a big decision. Programs can last for years, cost real money and affect your credit. A good company will answer your questions clearly and in writing. A company that dodges them is telling you something too. Here are ten questions to ask, and what a good answer sounds like.

1. “What are all of your fees, and when do you charge them?”

Ask for every fee in writing: setup fees, monthly fees, and settlement fees. For debt settlement, federal rules say a company can’t collect fees until it has settled at least one of your debts and you’ve made a payment under that settlement.

Red flag: any fee before a debt is settled.

2. “Have you reviewed my whole financial situation?”

A legitimate company or counselor looks at your income, expenses and all your debts before recommending anything. The FTC warns that scammers enroll you without a real review.

3. “Which of my debts can this program cover?”

Settlement and debt management plans usually cover unsecured debts like credit cards and medical bills, not mortgages, car loans or, usually, federal student loans. Some creditors won’t work with settlement companies at all. Ask which of your creditors are likely to participate.

4. “How long will it take, realistically?”

Settlement programs and debt management plans often take several years. The FTC says a debt management plan can take 48 months or more. Ask for an estimate for your situation, and what it assumes.

5. “Will I need to stop paying my creditors?”

Many settlement programs work this way. If so, ask the company to explain the consequences in writing: late fees, penalty interest, collection calls, damage to your credit score and possibly lawsuits. Read what happens if you stop paying your credit cards.

6. “What happens if a creditor sues me?”

A company can’t promise to stop lawsuits. Ask whether it provides any legal help, what it costs, and what you should do if you’re served with court papers.

7. “How will this affect my credit?”

Get a straight answer. Missed payments and settled accounts hurt your credit. A debt management plan with on-time payments is usually milder. Compare the options in how debt relief affects your credit score.

8. “Could I owe taxes on forgiven debt?”

If a debt is settled for less than you owe, the forgiven amount may be taxable income, according to the IRS. A good company will tell you this up front and suggest you check with a tax professional.

9. “Can I cancel, and what happens to my money?”

For settlement programs that use a dedicated account, the FTC rule says the money is yours and you can withdraw at any time and get your money back, minus fees already earned, within seven business days. Ask for the cancellation terms in writing.

10. “What other options should I consider?”

An honest provider will mention alternatives, including free ones: nonprofit credit counseling, a debt management plan, a consolidation loan, a tighter budget, or talking to a bankruptcy attorney. Compare at least one of these before deciding. Our guide to debt settlement vs. debt consolidation is a good place to start.

Before you sign

• Read the whole agreement. Don’t sign anything with blank spaces.
• Check for complaints with your state attorney general and the CFPB complaint database.
• Never give your bank login or pay with a gift card or wire transfer.
• Take your time. Pressure to sign “today” is a warning sign. See 7 signs a debt relief company is a scam.

The bottom line

Good debt relief providers expect questions and answer them in writing. If you can’t get clear answers about fees, timing, risks and cancellation, keep looking. And talk to a nonprofit credit counselor through the NFCC before you commit to anything.

Sources: FTC: Debt Relief Services & the Telemarketing Sales Rule · FTC: looking for debt relief? Here’s how to avoid a scam · FTC: how to get out of debt · IRS Topic 431: canceled debt