What You Need to Know About Debt Reduction Services (Are They a Scam?)


Can you trust debt reduction services? If you can, which ones can you trust? This area of debt management can be opaque and hard to understand. Even worse, so-called “debt reduction” companies can sometimes turn out to be predatory services that will leave you worse off than before. When you’re in debt, it’s tempting to look for that quick fix that will help solve your problems, and disreputable companies sometimes take advantage of people’s desire to quickly end the misery.

While we can’t list every untrustworthy company out there, we can help you learn how these types of services work and which ones are worth your time and effort:

Debt Settlement Services

Debt settlement is where you make a deal with your creditors to pay off your debt in a lump sum for an amount smaller than what you owe. You can actually do this on your own if you set aside an amount of money in savings to make a one-time payment and then negotiate with your creditor on your own (telling them you will be willing to pay a one-time lump sum in return for having the remaining debt waived). The amount of the lump sum necessary to reach a deal varies on a case-by-case basis, but it’s often anywhere from 10% to 50%.

On the other hand, there are many companies which offer debt settlement services. This type of debt reduction service requires that you deposit a certain amount of money each month, which goes to an escrow-like account managed by the debt settlement company. Debt settlement companies offer to help you negotiate with your creditors, and they use these monthly payments into your escrow account to get leverage with your creditors.

However, a lot of the debt settlement programs are illegitimate or downright predatory. Often, they will take your monthly payments (sometimes including an initiation fee) and fail to reach a settlement without ever giving you your money back. In those cases, you can be left with even more debt and an even worse credit score as a result.

Before you sign with a debt settlement company, be aware of the risks. Debt settlement companies often require that you only remit payments to them rather than your creditors, but your creditors are not required to agree to this arrangement. That’s exactly what can hurt your credit score. And if you don’t have enough money to make the payments, you may need to drop out of the program, which will result in fees from both your creditors and the debt settlement company.

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For further information on understanding debt settlement and how you can identify predatory companies, go straight to the source, the Federal Trade Commission (FTC).

Debt Management

Debt management companies offer to negotiate reduced interest charges, lower fees, and lower monthly payments for your debt. Unlike debt settlement companies, they don’t negotiate your amount owed (i.e. your total balance or principal). While this type of debt reduction service can be less risky than a debt settlement program, it is still good to be aware of the details before getting involved with such a program.

You might use a debt management program (DMP) if you are having trouble with making monthly payments or if you’ve signed up for a non-profit credit counseling program to help you get your spending and finances on track. (Most debt management companies are non-profit, though for-profit ones do exist) But just because a program is a non-profit, that doesn’t mean you should automatically trust it.

Instead, research the company and ensure that it is listed on the Department of Justice’s list of approved credit counseling agencies.

Debt Consolidation

This kind of service helps you by consolidating all of your existing loans into one new loan. As part of the service, you can get lower monthly payments or interest rates. For example, you might consolidate all of your credit card debt onto one credit card with a balance transfer, or you might consolidate your student loans into one loan payment, etc.

Be aware that some “debt consolidation companies” out there are promoting debt consolidation when in reality they are offering one of the other types of debt reduction services, such as debt settlement or debt management.

If you’re considering debt consolidation, the most important thing is to know that you only need to go to your local bank or to call up a credit card company or peer-to-peer lender in order to find information about debt consolidation. Also, before you do debt consolidation, consider if you’ll be able to make the payments set forth in the agreement. If you have done the math and looked at your budget, and believe you can do it, then this may be a good option. (You can read more about it here)


This is the kind of debt plan that gives you the most control, because as the title suggests, it’s a method that you carry out yourself and it is tailored to your own situation, budget, and needs. There are many online tools that now can help you with reducing debt, including ReadyForZero. If you choose to go the “DIY” route, you want to make your monthly payments on time and track your debt reduction so that you can celebrate your wins. Look for reviews of the tools before signing up so you can know what it is you’ll be signing up for.

Ultimately, there isn’t a magic fix for your debt. But knowing what these primary debt reduction services are like can help you stay on a safe path and avoid getting caught up in a scam of some kind. What any plan requires is discipline. One’s debt didn’t come up overnight and it won’t disappear overnight, and the only way to fix it is to be committed to changing habits and paying it off over time.

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