Debt Settlement Source: Education.com
Negotiating with Creditors and Getting Help: Avoiding Debt Settlement Firms
Some people confuse debt settlement firms, also known as debt negotiation firms, with credit counseling agencies. Don't make this mistake. Although a debt settlement firm may try to confuse you by choosing a name that sounds like a nonprofit credit counseling agency, debt settlement companies are in business to make money. The services they offer are very different from those of a legitimate credit counseling agency. Also, if you work with a debt settlement firm, you risk harming your finances and damaging your credit history and your FICO score.
Being wary of false promises
Debt settlement firms claim that they can settle your unsecured debts for less than the full amount you owe on them. In other words, after you pay the settlement amounts, your creditors will consider the debts to be paid in full. For example, if you owe $10,000 in credit card debt, a debt settlement firm may tell you that it can get the creditor to agree to let you pay the debt off for $6,000.
You can try to settle your own debts, for free. You don't need a debt settlement firm to do it for you.
(But keep in mind, that if a creditor agrees to forgive part of your debt, the IRS will probably treat that forgiven amount as income to you, and you will be taxed on it. If you receive an IRS 1099 form related to a debt that you settled, talk to a CPA. If the CPA can prove that you were insolvent at the time that the amount of the debt was forgiven, you won't be taxed on that amount. You're insolvent if you don't have enough money to pay your debts and living expenses and you don't have any assets you can sell to pay off the debts.)
Some debt settlement firms also promise that after they settle your debts, they can get all the negative information related to those debts removed from your credit history. Not true! Only the creditors that reported the negative information can remove it.
If you agree to work with a debt settlement firm, you may be told to stop paying your unsecured creditors and to begin sending that money to the firm itself. The problem is that a debt settlement firm may be all talk and no action. It may not be able to settle your debts for less. In fact, it may not even try. Furthermore, if it does intend to try to settle your debts, it may take months for the firm to accumulate enough money from the payments you are sending to be able to propose settlements to your creditors. Meanwhile, your debts are going unpaid, your credit history is being damaged further, and the total amount you owe to your creditors is increasing because late fees and interest are accumulating.
If you question a debt settlement firm about the consequences of not paying your debts, you may hear that your unsecured creditors won't sue you for their money. That is flat-out wrong.
Preventing worse financial problems
Debt settlement firms charge much more money than legitimate credit counseling agencies. If you work with a debt settlement firm, you may have to pay one or more substantial upfront fees, as well as additional fees that may be based on the number of unsecured credit accounts you have, the amount of debt you owe, or the amount of debt that the firm gets your creditors to forgive. In the end, the cost of working with a debt management firm may be more than the amount of money you save from settling your debts.
Be careful if a debt settlement firm offers to loan you money, maybe more than you can really afford to pay. Not only is the loan likely to have a very high interest rate and other unattractive terms of credit, but if you are not careful, you may sign paperwork giving the firm the right to put a lien on an asset you own. The firm is hoping that you'll fall behind on your loan payments so it can take the asset from you.
Better Business Bureau Tips for Working Debt Settlement Companies
Source: Council of Better Business Bureaus
Better Business Bureau is warning financially troubled families to beware of misleading debt settlement companies that claim they can easily reduce or eliminate credit card debt. Since the start of the recession, BBB has received more than 3,500 complaints from individuals, including many who paid hundreds of dollars in upfront fees to debt settlement companies but only fell deeper into debt.
“The debt settlement industry is flourishing and many families are being lured into believing that debt settlement is an easy fix and that their credit card debt will just disappear,” said Stephen A. Cox, President and CEO of the Council of Better Business Bureaus. “The truth is that the process doesn't work for many consumers, it has potentially serious negative consequences, and should primarily be used as a last ditch effort to stave off bankruptcy.”
Consumers from all 50 states have filed complaints with BBB about debt settlement companies since the recession began in late 2007. In addition to BBB, angry customers are also taking their complaints to their state Attorney General. Attorneys General from Florida, Maine, Texas, Idaho, Missouri, New York, Illinois, West Virginia, Vermont and Minnesota have taken action against companies such as Dallas-based Debt Settlement America, Debt Rx USA, Financial Freedom of America and Credit Solutions —which has received more than 1,600 complaints alone in the last 36 months—and Austin-based Clear Your Debt and Swift Rock Financial Solutions.
Some practices by debt settlement companies are also coming under fire on Capitol Hill. Senator Charles Schumer (D-NY) introduced The Debt Settlement Consumer Protection Act in April 2010 which seeks to “protect consumers from deceptive, abusive and financially injurious practices rampant in the debt settlement industry.”
Typically with debt settlement (also referred to as debt negotiation), the consumer pays an upfront fee to the debt settlement firm with the understanding that the company will try to negotiate a settlement with creditors for less than what is owed. The debt settlement business works with the consumer to establish a plan for the consumer to put money into an account administered by the debt settlement company or a third party, and that money is used to pay any negotiated settlements. It will usually take at least six months to a year before there is enough money to start settling accounts, and during that time the consumer will typically not be making payments to creditors. Not only does this put the consumer at risk of having creditors file garnishments or other legal actions, his or her credit rating will likely suffer as a result of not making required monthly payments.
Complainants to BBB allege that instead of having their debt settled as promised, they were driven deeper into debt and sometimes sued by their creditors—which led to mounting legal fees—and had their wages garnished. Some complainants decided after making several months worth of payments that they did not want to proceed with the debt settlement process, but the debt settlement company did not give them their money back which they had set aside—in one case as much as $15,000.
BBB warns families that are drowning in debt to look for the following red flags when considering getting help from a debt settlement or negotiation firm:
- High upfront fees – Beware of companies that require large upfront fees before any debts are settled. Often, these upfront fees may be better used to reduce a consumer's overall debt.
- Promises that are too good to be true– Some companies might promise that they can reduce debt by more than half even before looking into the customer's financial situation.
- Claims that it's a fast, easy and painless process. - Reducing debt through debt settlement takes time—often years—and can have a significant negative impact on the customer's credit score. It can also expose consumers to lawsuits and garnishments.
Before enlisting the help of a debt settlement company, BBB recommends that struggling consumers:
- Contact their lender first. – Try to work out an agreement directly with your lenders before enlisting outside help.
- Seek help from a non-profit credit counseling center – Credit counseling centers can provide guidance for little or even no cost. You can find a credit counseling center near you at the National Foundation for Credit Counseling, www.nfcc.org.
- Consider debt settlement only as a last resort before filing for bankruptcy. The debt settlement process can take years and have a severely negative impact on your credit rating and can limit your access to future credit. In the meantime, your credit card company or other creditors can decide to take you to court and garnish your wages. It is best to avoid these potential consequences if you have other workable alternatives to dealing with your debt.
- Research the debt settlement firm with BBB first. Find out how many complaints it has received, how the firm responded to complaints and whether or not there are any recent government actions or lawsuits against the company.