Debt Settlement Companies, also known as debt relief companies, are usually expert negotiators. These companies attempt to resolve credit card debt and other types of debt for substantially less than what you owe on those debts.
Selecting A Debt Settlement Company
The debt relief company usually earns a percentage-based fee for its services. The fee is generally 15 to 25 percent of the total amount of the debt settled or the amount of savings the debt company obtains for you.
As to the latter, if the debt relief company reduced your enrolled total credit card debt by $10,000, the fee owed to the company would be on the low side, $1,500, and on the high side, $2,500.
Therefore, you must carefully review your agreement with the debt settlement company before signing it. It is strongly advisable to consult a financial advisor or a consumer rights lawyer to help you understand the terms and fees of the contract.
The Way Debt Settlement Companies Work
Debt settlement companies usually are for-profit organizations. The way debt relief companies work generally is when you retain them to settle your debts, you will likely be asked to stop paying on your credit cards and instead deposit these payments into a dedicated account managed by the debt settlement company.
When the dedicated account reaches a certain level, the debt settlement negotiator will begin settlement discussions with your credit card companies and other creditors.
The debt settlement objective is to negotiate the debt sufficiently so that the creditor agrees to accept substantially less than what is actually owed. The negotiator can then use the client’s funds in the company’s dedicated account to settle and close the various credit accounts.
Potential Downside to Debt Settlement Companies
The resolution, which represents the debtor’s monetary relief, comes from the accumulated amount in the dedicated account – and that’s where the process can run into problems:
The system only works if the client deposits sufficient funds into the dedicated account in an amount that covers both the debtor’s outstanding enrolled debts and the fee of the debt settlement company for having resolved your debts.
Using A Debt Settlement Company Will Likely Impact Your Credit
The debt settlement company’s advice that you stop paying even the minimum amounts on your credit cards will likely negatively impact your credit score.
Missing credit card payments stay on your credit report for seven years. So, if you were hoping to salvage your credit rating by using a debt settlement company, you may be disappointed. Again, it’s best to consult a financial advisor or consumer attorney before retaining a debt settlement company.
Having Declared Past Bankruptcies
If you had declared a Chapter Seven Bankruptcy, your credit would have been negatively impacted for ten years. Therefore, when weighing your options, you need to consider how much money you would have saved going bankrupt versus resolving your debt through the debt settlement process.
Select a Highly-Rated Debt Settlement Company
Regarding selecting a debt settlement service, Investopedia has reviewed and ranked National Debt Relief as their “best overall” choice of debt relief companies. Moreover, the Better Business Bureau (BBB) has rated National Debt Relief an A+. However, you should perform a current investigation into the company’s business practices and BBB standing.
Benefits Of Using National Debt Relief
As of the date of this article, National Debt Relief contends they do not charge up-front fees. They claim only to charge a fee when you have approved the settlement agreement and your debts are settled.
If your accounts aren’t settled, you don’t pay anything. If and when your debts are settled, the average client pays a fee of 15% to 25% of the total debt enrolled as part of your monthly payment.
The types of debt relief National Debt Relief accepts include credit card debt, medical debt, personal loan debt, divorce debt, retiree debt, and veteran’s debt.
Before retaining a debt settlement company, you may wish to consult with a consumer rights lawyer. In addition, depending on the size of your debt and whether you realistically believe you will be able to repay the debt, you should also consult with a local bankruptcy attorney.
Common Misconceptions About Using A Debt Settlement Company
Misconception: Debt settlement companies can eliminate all types of debt.
Reality: These companies typically only work with unsecured debts like credit cards and personal loans. They cannot settle secured debts like mortgages, car loans, student loans, or government debts.
Misconception: Using a debt settlement company won’t affect your credit score.
Reality: Debt settlement usually severely damages your credit score because it requires you to stop paying creditors during negotiations, resulting in late payments and settled debts being reported as “settled for less than the full amount.”
Misconception: All debt settlement companies are legally required to be licensed and regulated.
Reality: Many debt settlement companies operate with minimal oversight. Researching and choosing companies registered with organizations like the American Fair Credit Council (AFCC) would be a good first step. You may also wish to check the company’s credentials with the Consumer Financial Protection Agency.
Misconception: You only pay the debt settlement company if they successfully settle your debt.
Reality: Many companies charge upfront fees or monthly fees regardless of success, and these fees can be substantial, often 15-25% of the enrolled debt amount.
Misconception: Creditors are legally required to accept settlement offers.
Reality: Creditors have no obligation to negotiate or accept settlement offers. Success depends on the creditor’s willingness to settle and the settlement company’s negotiation skills.
Misconception: Your debts will be settled quickly.
Reality: The debt settlement process typically takes years, and there’s no guarantee all debts will be settled successfully.
Misconception: You won’t face any legal consequences while working with a debt settlement company.
Reality: Creditors can still sue you for unpaid debts during the settlement process, and you remain legally responsible for all debts until a settlement is reached and paid.
Misconception: The money you save through debt settlement is tax-free.
Reality: The IRS generally considers forgiven debt as taxable income. If a $10,000 debt is settled for $6,000, you may owe taxes on the $4,000 difference.
