Debt Relief, Consolidation, or Counseling: Which Free Path Fits You

Start here: you have more than one option

If you are behind on bills, you may have seen ads promising to make your debt disappear. Before you pay anyone, it helps to know the real choices in front of you.

The Consumer Financial Protection Bureau (CFPB) lays out a few common paths. Each one works differently, and each one carries different risks. Understanding them can save you money and stress.

The good news: some of the safest options are free or low cost. You do not have to hand your money to a company that promises the moon.

Debt settlement: the risky one to watch closely

Debt settlement companies (also called debt relief or debt adjusting companies) say they can get your creditors to accept less than you owe. The CFPB warns that dealing with these companies can be risky.

Here is why. These companies often charge expensive fees. Many tell you to stop paying your bills so creditors will negotiate. But when you stop paying, late fees and interest pile up, and a creditor may even sue you. The CFPB warns that debt settlement may leave you deeper in debt than when you started.

Some creditors simply refuse to work with the company. If only some of your debts get settled, the built-up fees on the rest can wipe out any savings. And forgiven debt can be counted as taxable income, so ask a tax advisor.

Walk away from any company that charges fees before settling your debt, guarantees your debt will go away, tells you to stop talking to your creditors, or touts a 'new government program' to erase credit card debt. The CFPB names all of these as warning signs.

Free and lower-cost paths to consider first

The CFPB says to consider all your options before signing with a settlement company. Two of them cost little or nothing.

First, you can negotiate directly with your creditor or debt collector yourself. It is free, and you stay in control.

Second, a nonprofit consumer credit counseling service can work with you and your creditors to build a debt management plan you can afford. These nonprofits often help you make a budget and offer other financial counseling too.

You may also want to talk with a bankruptcy attorney about your options under the law. The CFPB notes that some bankruptcy attorneys will speak with you at first free of charge.

OpenFinancial is not a government agency and not a bank. We cannot settle your debt or speed anything up. But we can point you to the free, official information so you can decide what fits you.

Frequently asked questions

Is there a real government program that erases credit card debt?

No. The CFPB says to avoid any company that touts a 'new government program' to bail out personal credit card debt. That is a warning sign of a scam.

Do I have to pay a company to deal with my debt?

No. You can negotiate directly with your creditor yourself for free, or work with a nonprofit credit counseling service. The CFPB lists these as options before you consider a paid settlement company.

Can a debt settlement company guarantee it will lower my debt?

No honest one will. The CFPB says to avoid any company that guarantees it can make your debt go away or pay it off for pennies on the dollar.

Could settling my debt cost me at tax time?

It might. The CFPB warns that if part of your debt is forgiven, it could count as taxable income. Consider talking with a tax advisor.