Debt reduction service is provided by individuals or organizations who work as middlemen between you and your creditors. It is especially useful for those debtors who have accumulated debt from a variety of sources and find it very difficult to deal with their creditors.
The way it works is that you gather all your unsecured debts together and provide that to the debt counselor. They set up an arrangement wherein you make one lump sum payment to them and they in turn distribute that money amongst your creditors. If you have secured loans you would have to refinance those with a debt consolidation loan.
Debt reduction services are often able to negotiate better repayment plans, reduced interest rates and at time a balance reduction. There is one drawback to this. It can be reflected negatively on your credit report and prevent you from receiving credit in the future.
However, it may be worth the sacrifice if the alternative is bankruptcy. Bankruptcy is a truly ugly mark on your credit report and makes you an extreme high risk for lenders. It is better to go with the option that will have the least negative affect long term.
Many debt counselors charge a 10% commission for the service they provide. At times creditors also give them a rebate. In rare cases this rebate is passed on to the debtor.
All debt counseling agencies are not trustworthy. Some can not be relied on to make timely payments. Others use inappropriate methods in handling your money and making payments. You must be careful in the choice you make.
Some debt managers have been known to use the deposits they receive from debtors for things other than to make the payment to creditors. This hurts the debtor who is expecting that payments to his creditors are being made on time each month.
There is sometimes unpleasantness when you default on payments or delay payments. It is therefore important to clarify this point before hiring a debt reduction service. In fact, you must employ only that service with which you are comfortable. There is no point in employing a debt reduction counselor with whom you end up feeling more harassed and cheated.