Ara Betty is a freelance financial writer and speaker about personal financing. She helps people realize their goals on becoming debt free with the use of debt consolidation. She hopes to expand her knowledge more about loans and debt to be able to write a book.
When you are deeply in debt and searching for a way out, it might get overwhelming very quickly. You may discover that there are credit card debt settlement companies that could help you in settling credit card debt. In fact, they offer to make your debt go away and they could do it cheaply. Truth is, there are some risks debt settlement. However, it may still be your best option out of crippling debt.
However, you should know that the good offer comes with some downfalls which you should take note of when making your decision. Rushing into something is never a good idea. That is why we want to help you make an informed choice in this article.
What are debt settlement companies?
Debt settlement companies offer debt settlement programs which normally consist of a series of steps. Their job is to negotiate your debts with your creditors and resolve them either in part or in full. They will reach a “settlement” with your creditors which is a lump sum payment that is less than what you actually owe. Of course, you still have to pay that lump sum.
You will be asked to put in monthly payments in a special savings account until a settlement is reached. It might sound tough to keep up with those monthly payments. However, when you are in debt, you have to pay back one way or another anyway.
Another thing is that debt settlements are typically offered by pro-profit organizations, meaning that they make money in the process. For debt settlement companies, it is a business like any other and it is not unusual to benefit from what they do.
Moreover, some debt settlement programs will request you not to make any payments to your creditors while you are part of the program. They might even ask you not to communicate with them in any way. Even though that might seem hurtful for you in the first place, any action on your part might harm future negotiations with your creditors.
The risks of credit card debt settlement
Debt settlement companies are able to settle one or more of your debts. At what cost though?
- You would probably be required to deposit money in your special saving account for up to two years before all your debt can be settled. That equals to 36 monthly payments. Many people find it impossible to keep up and as a result, drop out of the debt settlement program. Although that is a bad way out of the situation, it can be easily avoided through careful planning. When you have reviewed and planned your budget, you will be able to make the monthly payments. All you need to do is make sure you can keep up with the payments until the end of the debt settlement program. In any case, that sounds better than being chased by your creditors
- Although it is the established practice, some of your creditors may not agree to negotiate your debt. They are under no obligation to negotiate with your debt settlement company once they approach them to reach an agreement. So there is some chance your debt settlement company may not be able to settle some of your debt. However, that was never the deal. They have promised to settle your debt either partly or in whole.It is your responsibility who you start owing and how hard it is to deal with them later.
In most cases, your debt settlement company would be useful to you because they work with creditors on a daily basis and have established relations with your creditors.They know what to expect and how to proceed so they will have a realistic idea what can be achieved. All you need to do is discuss your expectations with your debt settlement company and be clear of what they can offer. You need to be realistic too. In case you don’t have your debt settlement to settle your debt, you will have to deal with those hard nosed creditors on your own.
- Your debt settlement company may settle your smaller debts first. That means interest and fees on your bigger ones might go up in the meantime. The problem with being too much into debt is you often end up with many different debts owed to many different creditors. To be debt-free, you need a strategy. Reducing the amount of debt is one of them. Many creditors would be much more willing to negotiate with someone who has two creditors than with someone who has 50.
- You might get calls from your creditors or debt collectors requesting you to pay again. Although those might be unpleasant, you should know they do not have the legal right to be paid twice for the same debt. If you want to stay out of trouble, do not do anything rash. It is probably best if you consult your lawyer. The important thing is not to let yourself become an easy victim. If they see they have a chance to deceive you, they will use it and might even sue you for not paying up. All you have to do is be prepared and know your rights.
- Being part of a debt settlement program might have some negative effect on your credit report. That is because debt settlement programs often encourage you to stop sending payments directly to your creditors. However, it is an inevitable temporary situation that will change once you are out of debt. What can be better for your credit report than being debt free? Anyway, in most cases, you have a choice how to proceed so it is up to you.
How to avoid debt settlement scams?
Take your time when choosing the right credit card debt collecting company. There area few ways in which they might try to deceive you and leave you with nothing of what they have promised. The most popular debt settlement scams are:
- Some companies try to charge you fees before they have settled any of your debt. Although at some point that may sound reasonable as they are providing you a service, you should know that in this situation, you are paying for nothing because you have no actual guarantee that they will fulfill whatever promises they have given you.Another thing is that such a practice is forbidden by the Federal Trade Commission (FTC) in its Telemarketing Sales Rule (TSL) for companies engaged in telemarketing those services. However, you can be certain that you will find a debt settlement company which will not try to scam you. You just need to be careful with your selection.
- Some companies fail to explain the risks that come with their debt settlement programs. Many of the things you can expect though you can find in this article and some of them surely you can figure out on your own. Your debt settlement company is not obliged to simplify everything for you. Their job is to make your debt go away. Usually, they will fulfill their promises to you, regardless of whether they have told you everything or not.
- Some debt settlement companies claim that they can make your unsecured debt go away or that it can be paid for pennies on the dollar. Although, this is exactly how it works with a secured debt, it might go in a slightly different manner when it comes to an unsecured one. That involved a higher level of uncertainty and risks that unsecured debt has for the lender. An unsecured debt is simply said- a loan that is not backed up by any underlying assets. Your credit card debt falls under that category.
The only reason someone would be willing to extend such a loan is because they expect a full repayment. That is why many unsecured creditors are not be willing to negotiate with your credit card debt settling company. They might even want to sue to get back what you owe them. That is very reasonable behavior and it should not surprise you. However, some debt settlement companies can actually help you resolve your unsecured debt. Follow your track record, talk with satisfied clients of your preferred debt settlement company and decide whether to believe their promises or not.
- Some credit card debt settlement companies will request you to stop communicating with your creditor.That is because it is the standard practice. However, you may want to avoid a debt collecting company that takes that step without explaining to you what risks may come with it.Some of which may include you receiving unwanted debt collection calls, be requested to make repayments or even get sued which may affect your credit record sometimes. You want to be aware of the risks you are taking even when the debt collection company’s requests for you to stop communication with your creditors seem reasonable and necessary.
- Some credit card debt settlement companies may even try to promise you that they are making all debt collectors calls and managing lawsuits. Although it is possible that those companies have worked with your creditors in the past and have reached some kind of an agreement on debt settlement, it is usually a wise choice to avoid debt settlement companies that make such promises.
For one thing, those promises are very hard to keep. They depend entirely on a third party’s behavior and a creditor may change their mind anytime before the debt is settled. Be smart and stay away from credit card debt settlement companies that try to sugarcoat the process for you. If you really want to stay out of trouble and out of debt, find a credit card debt settlement company which you can trust.
How to choose good credit card debt settlement company?
The most secure thing you can do is choose your credit card debt settlement company carefully. There are a few things you can consider:
You do not want to go into business with a scamming company. You will spend a lot of your money in the processes of collecting the lump sum required by the program. Don’t just throw those away. You have two options- you can check the company with your state Attorney General or with your local consumer’s protection agency.
Preferably, do both. From the local consumer protection agency, you can learn if there are any consumer complaint against the company you are thinking of working with. Moreover, your state Attorney General can provide you with another kind of useful information – whether the credit card debt settlement company you have chosen is required to be licensed in your state and if so, whether it is licensed.
Another thing we recommend you to do is to enter the name of your debt settlement company of your choice into search engines. There you can see what others have said about it. You can also find out if there are state or federal lawsuits against it for being part of scam schemes.
You can also request the company to introduce you to some of their previous clients or ask for such among your circle of acquaintances. However, bear in mind that the things you heard may not be true. It is the same with the opinions you find on the Internet. Most companies are aware their potential clients will do a background check on them. Therefore, they can purposefully add positive comments on their business through fake profiles. Be critical of the information you receive.
What are the fees involved when settling credit card debt?
Bank account manager fee
When you become part of credit card debt settlement program, you would be required to put money in a dedicated bank account. However, this account will be managed by an independent third party. You may expect to be charged for this service.
You are still entitled to the interest from your money in the bank but that money would be used for payment to your creditors and for the fees you owe your debt settlement company. It is your account manager’s job to make repayments from your account. That is why you are paying him a fee for his service.
- Credit card debt settlement company fee
As mentioned above, you are not supposed to pay your debt settlement company in advance. You are only required to pay them after they have settled some of your debts. Even so, you are not supposed to pay them the full fee. They can only receive part of the fee for the amount of debt they have settled for you.
How does that work? For example, you have ten creditors and your debt settlement company has reached a settlement with only four of them. Therefore, they can receive only a quarter of their full fee or 40%. That goes for each successful settlement they make. For example, they managed to negotiate two more of your debts, they are entitled to another 20% of their full fee.
In some cases, the company’s fee is based on the amount you save through the settlement. Because they are negotiating for you to pay cents on each dollar you owe. In case you owe $10,000 and they manage to settle your debt for $8,000, you are saving $2,000. They sometimes would base their fee on this amount. This is known as “contingency” fee.
What information should your credit card debt settlement company provide you with?
Important: You should receive the following information before signing up for any debt settlement service. It is important for you to have know in advance to be clear about what you are getting yourself into.
- Price and terms
The debt settlement company you have chosen must provide you with detailed information of their terms and conditions. That is what they will require from you once you become part of their debt settlement program. They should also explain how much they will charge you for each thing so you are clear about how much the full service will cost and decide whether you can afford it.
They should clarify what they can help you to achieve within a certain time frame.The debt settlement whole process could take approximately three to four months but it varies from case to case. It is your debt settlement company job to set a time frame. You don’t want to be left disappointed with unrealistic expectations.
This means that before they reach a settlement with your creditors, you should reach a settlement with them. They must tell you how much money you should save before they go make an offer to your creditors. That amount is the sum you need to have in your special savings account as part of the debt settlement program.
- Non payments
The debt settlement company must inform you whether you are required to stop making repayments to your creditors and let you know how that can affect you.
Other information you should know:
– Although they stay in a separate saving account, you still own that money and you are entitled to interest from the bank
– Normally, you should be allowed to withdraw your money anytime without a penalty unless you have explicitly agreed to something else in your agreement with the debt settlement company. Otherwise, you would be a victim of theft and should seek legal protection. In any case, make sure you know what you are signing with the debt settlement company.
– The account administrated should be a third independent party. He should not be affiliated with the debt relief company. Therefore, he is not entitled to refer fee. Make sure they are not charging you for such.
What are the tax consequences of being part of a debt settlement program?
Although you are saving a lot of money by joining a debt settlement program, some of them may be considered income and taxable by the relevant authorities. This depends on your personal financial situation. What savings from the debt settlement program may be considered taxable?
In some cases, credit card companies may report your settled debt to the IRS. For taxing purposes, that would be considered income. There is one exception and that is the case of insolvency. If you are “insolvent”, it will not be considered as income. However, it is a complex issue and may be hard to determine.
It is recommended that you talk to a tax consultant to be sure you are classified under this exception. Insolvency occurs when your total debts are more than the fair market value of your total assets. A fair market value is an estimate market value that an average knowledgeable buyer would be willing to pay to an average knowledgeable seller on the market. This value should represent an accurate valuation or assessment of its worth.
What other debt relief options do you have?
- Talk with your credit card company on your own
Depending on how good you are at negotiating, you may consider consulting your credit card company on your own. Remember, this can go wrong in many ways as there is no way for you to know how they may respond. The last thing you want is to get on the wrong foot with your creditors. Also, they may turn you down.
If you don’t pay your debt for 180 days, your creditor will write it off as a loss. After that, they may be unwilling to negotiate with you. That is because they are already at a loss and don’t have the interest to reduce your repayment. They might be better if they sue you for the full amount you owe them. On the other hand, a debt settlement company in most cases will be able to negotiate a better deal on your behalf.
- Contact a credit counselor
Credit counseling organizations can advise you on how to manage your money if you believe advice would be enough to help you make your debt go away. Credit counselors will discuss your financial situation with you and come up with a plan. Although they work for non – profit organizations, it doesn’t mean their services are free. In many cases, their services will be neither affordable nor legitimate. Many credit counseling organizations charge high fees or encourage their customers to make “voluntary” contributions (that can lead you into more debt).
You should also check if the credit counseling organization is government-approved. The U.S. Trustee Program (part of the U.S. Department of Justice) has a list of all government-approved organizations.
- File for bankruptcy
Filing for bankruptcy has serious consequences. In fact, it can be one of the worst options. It will lower your credit score dramatically. Also, the filing process is hard and long. You are facing a repayment plan again – the only difference is that it should be approved by the court. It will also last longer from three to five years.
The only good thing is that after you have made all payments under the plan, your debts are discharged. Have in mind that you may not reach this point and find it very hard to make the required payments should you consider filing for bankruptcy.
There are also some specific requirements in the filing process. You must get credit counseling for six months before you can file for bankruptcy. It should also be done by a government- approved organization. There are many government fees you need to pay on top of varying attorney fees.
Filing for bankruptcy is the one thing you should try to avoid. Seek help from a professional credit card debt settling company instead.
Which option is best for you?
The financial situation for every individual is different. There are a couple of possible solutions for your current debt situation but you should bear in mind that everything comes with certain amount of risk and possible negative effects. Credit card debt settlement remains the easiest and fastest way to become debt-free by far.