TIPS AND ADVICE


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Debt Negotiation and Settlement

Debt Settlement Programs

Debt settlement companies, also known as debt negotiation companies, negotiate with your creditors to settle your debts for less than you owe—usually around 50 cents on the dollar. The clear benefit of working with a debt settlement company is that they are trained professionals with insider knowledge. They know what to ask for and when.

The largest and best debt negotiation companies can actually get the best settlements for their clients due to the amount of debt they control. Think of it as a volume discount—a creditor is likely to take a lower settlement amount if it can settle a larger number of accounts. Something is always better than nothing to a creditor who has no guarantee they will collect anything on a delinquent account.

There has been a lot of bad press about debt settlement and debt negotiation companies, so make sure you do your homework before choosing to work with one. They should be a member of either TASC (The Association of Settlement Companies) or USOBA (United States Organization for Bankruptcy Alternatives) and make sure they are FTC compliant.

The Truth About Debt Negotiation Companies

The truth about credit card debt settlement companies is that they are able to settle your accounts for less than you owe because they cause you to go into default (if you aren't already in default). The reality is that creditors won't consider a settlement offer until you have fallen behind on your payments.

Falling behind on your payments will negatively impact your credit score and since you are still liable for your debts, the creditors will continue collection attempts against you until a settlement has been reached.

You should also be aware of the fees associated with debt settlement programs. Under UDMSA (Uniform Debt-Management Services Act) legislation, debt negotiation companies are generally allowed to charge up to 17% of debt amount. Additionally, you may have to pay taxes on the difference between the settlement negotiated and the amount you owed.

Make sure you discuss these issues with any debt negotiation company you consider working with.

Debt Settlement Laws

In August of 2010, the Federal Trade Commission amended the Telemarketing Sales Rules (TSR) to reign in the debt relief industry. In particular, debt settlement providers may not charge a fee until all of the following occur:

  1. The debt settlement company successfully renegotiates, settles, reduces, or changes the terms of at least one of the consumer's debts;
  2. There is a settlement agreement or some kind of agreement between the creditor and the consumer, and the consumer has agreed to it; and
  3. The consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

The exception to this rule is if the client meets face-to-face with an attorney or attorney group. Therefore, many debt negotiation and settlement companies have switched to an attorney-based model, while others are delaying their fees until a settlement has been reached. Attorney-based models are available in 48 states, while delayed-fee models are available in about 30.

Do-It-Yourself Debt Negotiation

Although it may seem daunting to deal with creditors who try to scare and intimidate you, being armed with the right information and knowledge, you may just be able to settle your accounts yourself.

Here are the basics of debt negotiation:

  • Don't attempt debt negotiation until you are at least a few months behind with the original creditor or your account has gone to collections.
  • You are likely to get a better settlement from a debt buyer that the original creditor.
  • Try settling your accounts toward the end of the month.
  • Tell them you have a limited amount of money to settle with your various creditors and let them make the first offer. Counter with a third of that amount or a third of what you are willing to pay.
  • Always make sure they update your credit report to paid as agreed or remove the tradeline altogether.

Want more information on DIY debt negotiation and settlement? Check out our free tutorial on debt see tutorial on debt settlement in the

Avoiding Debt Negotiation Scams

As a group, the debt settlement industry has a tarnished reputation for fraud and abuse. You have probably seen the ads on TV, "Settle your debts for 50% of what you owe with one low monthly payment!" Sounds great, right?

The reality is you will not experience any debt relief unless or until you settle your accounts. Since creditors (and debt settlement companies) are looking for lump-sum settlements, the money you send to a debt negotiation company each month isn't going to your creditors. It is going into an escrow account for future settlements. During this time you are still in default and collection activities will still continue against you.

The scammers in the industry don't tell their clients the whole truth. The clients were allowed to believe—or even told outright—that enrollment into a debt settlement program was as simple as sending them a low monthly payment and they would "handle the rest." Furthermore, many debt negotiation companies would front-load their fees due to high drop out rates and leave their clients in worse shape than when they entered the program.

To protect yourself, make sure any debt settlement company you are considering working with is a member of either TASC (The Association of Settlement Companies) or USOBA (United States Organization for Bankruptcy Alternatives). Or, simply fill out the form on the left.