Are Debt Relief Agencies Helpful? Part 2

By MMBB Financial Planning Specialist Tyler Howard, CFP® 

What You'll Find in This Article: 

• Is Using a Debt Relief Agency Worth It?
• DIY Alternatives.
• How to Choose a Reputable Agency.
• Beware of Red Flags When Choosing a Debt Relief Company.

Last month in Part 1, we explained what debt management agencies are, what they do, and the pros and cons of using them. In Part 2 of our series, we explore how to choose a debt management company, red flags to watch for, and when it makes the most sense to enlist these agencies.

In part 1, we met Maria. We found her sitting at her kitchen table, scrolling through overdue bills and reminder emails she had flagged for later. Credit cards, medical expenses from an unexpected surgery, and a high-interest store card had piled up faster than she had imagined. For months, she had juggled payments and shifted balances, telling herself things would soon settle down. Now, even minimum payments felt impossible. Her credit score had suffered, and the stress was disrupting her sleep, mood, and work. Desperate for relief, Maria called a debt relief agency. The representative promised major reductions in her debt but gave vague answers about fees, leaving her unsure whether using the agency would be a financial mistake or a good solution.

Is It Worth It?

A debt relief program may be worth considering if you have significant unsecured debt—such as credit cards or medical bills—cannot make the monthly payments, and a financial professional has recommended such a program. It may also be a reasonable option if you have lost your job, have limited assets, or cannot qualify for a consolidation loan.

It is generally not worth using a debt relief company if you can still make the minimum payments or if the debt is small enough that you can negotiate with creditors yourself. If you plan to buy a home or a car in the near future, you should probably avoid debt relief agencies, as they are likely to have a negative impact on your credit score. Ultimately, the decision to enroll in a debt relief program is one you should discuss with a financial professional first.

DIY Alternatives

If you decide not to use an agency, there are effective ways to manage debt on your own. Here are some proven tactics:

• Negotiate directly with your creditors. You do not need a third party to do this.
• Consider a debt consolidation loan. These loans typically offer a fixed interest rate and a set repayment term, often ranging from two to five years.
• Consult a financial advisor or a nonprofit credit counselor. They can help you choose an effective payoff strategy, such as the debt snowball method or the debt avalanche method.

How to Choose a Reputable Agency 

Debt settlement companies vary widely in their terms, plans, requirements, and legitimacy. Consider these important factors when evaluating a company:

1. The agency should be accredited by the American Association for Debt Resolution, and its counselors should be certified by the International Association of Professional Debt Arbitrators.
2. Ask whether the counselors work on commission. If they do, they may be salespeople rather than true credit counselors.
3. Compare fees carefully. Legitimate debt relief companies cannot legally charge upfront fees. Always request a clear breakdown of all anticipated costs and fees before signing any agreement.
4. Read the agency’s reviews—both positive and negative—to get a realistic picture of typical client experiences.
5. Check the Federal Trade Commission’s (FTC) database for any banned debt relief companies that are prohibited from offering debt settlement services.

Beware of Red Flags When Choosing a Debt Relief Company
If you decide to work with a debt relief agency, watch for these warning signs, which may indicate the company is not reputable or could even be a scam:

• Companies that contact you unsolicited.
• Offers of “special” or secret ways to settle debt.
• Guarantees of specific results, especially before reviewing your financial documents.
• Promises of “total” debt forgiveness.
• Instructions to stop communicating with or ignore your creditors. Legitimate programs work collaboratively with you and your creditors.
• Claims of government affiliation or endorsement.

Maria eventually realized that debt relief agencies weren’t inherently “bad,” but they also weren’t a magic solution. After speaking with a nonprofit credit counselor, she decided that the do-it-yourself debt management approach was the best fit for her. For the first time in months, she felt she was finally moving forward with a plan she understood and trusted.