Understanding The Debt Relief Industry

The debt relief industry doesn’t really have the greatest reputation for some reason or another.  Perhaps the reason is because we secretly harbor resentment for people who get in way over their heads and look for solutions other than paying off their debt!  When you can solve your debt situation yourself by begging, pleading, calling your creditors to come up with a repayment program, why would you let a debt settlement company charge exorbitant fees?  If you make your case strong enough, you might even get the credit card company or the bank to forgive a portion of what you owe!

Thanks to the horrendous economy in recent years, consumer debt levels have risen to alarmingly high levels.  From buying that new car you shouldn’t have, to big screen TVs that ruin the feng shui in your bedroom, to luxury clothing with 95% margins that never get worn, to nice vacations which you think you deserve, to $100 meals per person, people’s consumer debt has blown up in a bad way.  Never fear though!  With the government ready to bail you out with incredibly long unemployment benefits, free money for your mortgage, and credits for paying on time (shouldn’t you do that anyway?), some consumers will be alright.  But for others, in come the debt relief companies to save the day!  Maybe.

The Issues With Debt Relief Companies

An acquaintance of mine was actually contacted by one of these debt settlement companies. He asked for my opinion, of which I had little, so I did some research. I posed as a potential candidate for this program and called a random debt settlement company I found online. I told them I had about $50,000 in credit card debt that I could no longer pay.  After a lengthy conversation, I found it interesting that they downplayed credit counseling programs in preference for debt settlement.

You see, these are two separate business offerings!  A credit counseling program comes up with a plan and provides educational services for a fee i.e. why are you such a donkey for getting into $50,000 in credit card debt if you can’t pay it off, here’s what you need to do.  A debt settlement company basically acts as your mercenary by trying to get your creditor to forgive some of your debt for a fee.

You’d think that debt settlement and credit counseling companies should work hand in hand to provide the best debt relief solution for a customer.  Instead, it’s one big land grab and sales pitch.  I mean seriously, what’s going on with this industry? If I was the average consumer, I would have definitely signed up for a debt settlement program if they could really reduce my $50,000 debt to say $15,000 and charge me less than $35,000 to do so.  The creditor gets $15,000 from me rather than $0, and the debt settlement company gets paid some percent of the recovery fee as a reward.  I spoke to my friend  and he decided that a credit counseling program, rather than a debt settlement company was best for him since it had the least affect on his credit score.  Sigh, he should just read this site or debt sites for free.

On Techcrunch, they profiled a company called Debteye.  You might have seen them around the blogosphere since they also have a blog.  After reading the article on Techcrunch, I decided to reach out to them and learn more about what they do, and more about the industry for my friend and the rest of you.

Q: So what does Debteye do?
A: We help consumers get out of debt without using expensive third party companies who charge outrageous fees to set up arrangements with their creditors. Our software will help customers set up payment plans and negotiate with their creditors to potentially lower their monthly payment.

Q: What are your fees?
A: Currently our software is free. Anyone who signs up will get a free lifetime account. We haven’t decided exactly how much to charge yet, but we expect that number to be anywhere from $10-$20/ month.

Q: How does your software help negotiate settlements for your customers?
A: Our software will automatically send settlement letters to the creditors at different times during the process. The creditors are also instructed to fax back offers/agreements to a specific fax # that we provide them. Clients can also call their creditors themselves to negotiate the account if the creditors are not responsive, but most collection companies respond within 72 hours.

Q: Isn’t it more effective to have service companies negotiate the debt instead of software?
A: Each creditor has their own process when it comes to lowering their interest rate or forgiving a principal balance. As a matter of fact, some creditors like Chase won’t work with debt settlement companies. We can replicate what the debt relief companies can do when it comes to negotiating with their creditors.

Q: How do you expect to change the consumer’s spending habit when it comes to getting out of debt?
A: That’s a great question. We believe that the most important piece of getting out of debt is learning how to stay out of debt after the program! We plan to encourage them by offering different tips & tools and rewarding them for good behavior. This is the next phase of development and will update you when it’s complete.

Q: What do you think the major problem is in the debt relief industry?
A: One problem is that many of them are not transparent with their fees. There are hidden monthly fees and customers are unaware of the fees associated with the program. Also, there’s no “one size fits all” debt relief product. Everyone has their own unique situation and needs to be evaluated thoroughly to see which program is right for them. There are very few companies who truly look out for the customer’s best interest.


It’s interesting to understand how everything has become so process oriented.  From the interview, it appears that one can’t just pick up the phone and call American Express to relieve you of $50,000 in overdue credit card debt, for example.  Instead, there is a process where you have to jump through hoops to get things done.  Paperwork, paperwork, paperwork, and bureaucracy!

I know several people with underwater mortgages who cannot even get someone to listen to their case.  Instead, they have to purposefully not pay their mortgage for 3 months and hurt their credit before the bank starts giving them the time of day.  How inefficient!

Y Combinator-funded Debteye has a good approach with their software system. After all, no one should really pay a third party company to handle their debts.  The real issue is the dang process of getting through and handling all the steps and the paper work.  Everything can be done on your own without seeking a debt relief company. Getting out of debt doesn’t have to be a confusing process.  The most important thing is to recognize the reasons why you are getting into debt in the first place, create a plan to get out of debt, and stay that way until you can better manage your finances.


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  1. says

    I’m in the situation you mentioned with the upside down mortgage. Because I’m not in trouble, and can pay my bills on time, I can’t get any kind of assistance because the bank knows it will get my money regularly and timely. Guess it’s my own fault for following through on my obligations. (And I don’t even have a tv in my bedroom!)

    The thing with counseling agencies is that I believe they have to be free and established as charitable organizations (or something like that) to be accredited. I’m still not so sure about how good they are in terms of looking out for a consumer’s best interest but they’re certainly a better option from everything I’ve researched than the debt relief companies.

    • says

      Non-profit is the biggest misnomer. An organization of 5 part ers who makes $1 billion can be non-profit if they just pay themselves $200 mil each and have no more profits! This is an extreme case, but that’s the idea.

      • says

        Yeah, it really is a little stupid. Plus, a lot of these “charities” spend so much of their money on administrative and operating costs (or so they call them) that the people that are supposed to help often times don’t see as much of that aid as they could be seeing.

  2. Untemplater says

    A lot of desperate people get bombarded with fees when they seek help to pay off debt. There needs to be more transparency and less paperwork across the industry. When people are in a tough spot they can easily say yes to the worst type of debt relief firms like the infomercial kind on TV that are full of hidden fees.

  3. The Genius says

    Thanks for highlighting this space. I am wondering about some more specifics:

    How much do credit counseling companies charge and how much do debt settlement companies charge? Is it a monthly fee, percentage of debt expunged, etc?

    How does Debteye determine the cost of their software? Should the scale it up the larger one’s debt? It would seem that the more debt a consumer has, the better value they get for using Debteye if it is a fixed cost.

    Interesting to hear that debt settlement hits one’s credit score. I guess that makes sense.


    • says

      Just to clarify, are these agencies charging the creditor or you the debtor?

      I you save me 1 billion, I will glady pay you 999 million theoretically. Shouldn’t these agencies charge both sides though as it’s a win if an agency can get the debtor to pay something?

  4. says

    I think they usually wait until things hit the fan because they want to make sure that you’re actually in trouble. Of course, this is a problem, as it all could have been avoided. Personally, I’ve never dealt with them.

  5. Dominique says

    CRedit counseling companies and debt settlement companies are very different animals.

    DEbt settlement companies will negotiate on your behalf with your creditors. The first truth is that you don’t need a settlement company to negotiate with your creditors; you can do it yourself. In either case, what you trying to do is repay less than what you owe–you will need to be behind several months on your payments for your creditors to even consider it– your credit will be negatively impacted for 7 years (time the negative notation stays on your credit report) — the amount of the debt relief ( the amount that is not being repaid) will be considered income to you, over a certain dollar amount- think 1099 — you are entering into a transaction without knowing what the final result will be (even thought you may be behind 6/12 months on your payments, creditors may decide that they would prefer to go to court and get a judgement against you and get a lien against your assets, that do a settlement with you– if you are using a settlement company, you will be paying upfront hefty fees with no guarantee on the results (most studies show that most people will desist within 6 months of going on, in which case, most of their money has been used to pay fees)– finally, there has been many instances of fraud in this industry.

    What attracts people to these companies is that :

    1. they often offer the image of respectability by insisting that everything will be handled by a “lawyer” or “law firm”.
    2. you will be able to pay cents on the dollar on their debt, without understanding the implications.
    3. they will offer a very low monthly payment, that in most cases, will be half of what you are currently paying their creditors.

    Credit Counseling companies don’t really negotiate on your behalf with your creditors. These companies have pre established agreements with most well known creditors and what they do is find people that will be able to meet the requirements of the creditors ( being in a hardship situation, being able to make the payments under the debt management plans, usually by making budget adjustments). Creditors will offer through Credit Counseling companies, better terms (think lower interest rates and lower fees) because, in most cases, these agreements require that all your unsecured creditors agree to it.

    The advantages of working with them is that they will provide substantial help and support to help you balance and control your budget (usually at no cost) — no or very little impact on your credit as you will be repaying everything you owe your creditors — credit brought current within 90 days in most cases –paying back all your unsecured debt within 5 years (60 months) — knowing up front what the final results will be.

    The disadvantages will be that you will have to close your credit cards (cannot use them anymore – note, you are closing them, you are not canceling them) — in most case your monthly payment will be higher than what is required by settlement companies, but lower than what you are paying now — you will be paying an enrollment fee ( $40 to $50) and a monthly service charge.

    Debt management plans are not for everybody. If the interest rates you are paying on your credit cards are low, there probably will be no financial advantage. If you are not in a hardship situation, and you are just looking to reduce your monthly credit card payments, your creditors will probably not agree to it.

  6. says

    I am enrolled in a debt management program, and it wasn’t my experience at all that debt settlement was pushed on me. When I enrolled, they listened to my story, took my creditor information, as well as my income and my budget and recommended the management course.

    They negotiated a monthly payment with each of my creditors – in exchange all my accounts were closed, and my interest rate was lowered. I am paying back every penny of my debt over the next five years.

    I pay my debt relief company, and they disperse the funds to my creditors. If I exit the debt management program, my interest rates and minimum payments get jacked back up.

    I’m saving thousands of dollars in interest, and my monthly fee to the management company is based upon the amount of debt owed – my fee is $50.

    Without this program, I probably would have had to sell my house and declare bankruptcy….

    • says

      Travis, great to hear they’ve helped you! Seriously good stuff.

      Scenario analysis: If you knew then sharing know now, about this benefit, would you be willing to recommend others go into more debt than a comfortable range? Seems like we should take out debt if we really need to.

      • says

        I would never recommend others go into more debt than a comfortable range. The program is certainly helping me eliminate my credit card debt. But, it does have it’s consequences. Your lines of credit on the program are closed. You are not allowed to open any new unsecured lines of credit while on the program. There may be accounts on your credit report that may be marked as “negative” because it’s enrolled in a DMP.

        No, I would certainly not recommend going into debt more than a comfortable range. This sort of thing is a resolution program for people in dire need…not something you should depend upon as a backup plan…

        • says

          Did you get any of your debt forgiven though? Not so bad to get things worked out and just pay cash for things no?

          I need to read what your debt situation was in the first place to get a better perspective.


  7. Darwin's Money says

    Well, we know someone that was kinda “outed” as owing over 100K in high interest credit card debt. It all kinda hit them at once, creditors started harrassing them, the family, etc. He used a debt relief company to consolidate the debts and get the 20 collectors off his back. I have no idea what his interest rate is but he seems to have pulled it together and is probably sleeping better. I don’t know how he got into that situation, but they seem to have helped him out of a bind.

  8. says

    This is very interesting. I kind of thought it was all one big animal, not two separate beasts.

    When it comes to debt management (and money management in general I suppose), it is so hard to know who to trust. Personally, I have never had to deal with any form of debt management, and I sure hope I don’t have to.

    I know someone that had to purposely not pay his mortgage so he could get assisted. It is one screwed up process.

  9. Dominique says


    Just a small clarification!

    1. When you enter a debt management program, the creditor can decide, if he wants to (in other words, it is not automatic), to include in your credit report, a notation that his debt to you is being handled by a debt management company. This notation will stay in your report for as long as the debt is outstanding. Most creditors would view this type of notation as something positive, as it is a sign that you are serious about resolving your unsecured debt situation.

    2. When you start a debt management program, those unsecured debts that are included in the program will be closed, but not cancelled. What this means is that you cannot use your credit cards anymore, but, and this is important, the underlying credit limits remain and are not cancelled. As a result your Total credit availability does not change, nor does your Debt to income ratio (DTI), and hence your credit score is not impacted in that way.

    3. As you continue on the debt management program, every thing else being equal, your credit score should improve as you will be building up a very good history of on time payments ( this probably counts for about 30% of your score) and you will be paying back and reducing your debt very quickly and improving your credit utilization ratios. By the time, you finish the program, not only will you be in better financial situation, but your credit credit will also be much better.

    4. Because of all the above, entering into a debt management program does not hinder your ability to borrow money to buy a new car or to get a mortgage to buy a house.

    Also, debt management plans only works with unsecured debt ( does not include mortgages, or home equity lines or car loans). It also does not work with student loans, tax liabilities, child support debts, and debts that already have judgments against them

    Also, I would add to what Kevin said about cease and desist letters sent by debt settlement companies. It may seem great not to have your creditors calling you up insistently. However, as Kevin points out, you loose control of the handling of your debt and before you know it, your creditor is going to court against you. And, if there is something that will prolong the agony of having large debts, is having judgments against you. They will not go away – they will be on your credit report for a very long time – your creditors will be go after any assets you have now or that you may receive in the future, and they will be very patient — and don’t think that with time, they will just go away.

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