Debt Settlement: What Are the Costs and Benefits? |
By Charles Park on September 1, 2010
.jpg.aspx?width=75&height=75) Till recently, the business model for credit card companies has revolved around luring customers into a sustained period of monthly minimum payments. With the current financial crisis affecting employment and housing prices, this model of collecting minimum payments from lenders who can no longer pay is no longer sustainable. With rising credit card debt, there has been a concurrent rise in delinquent accounts: open credit card accounts with late minimum payments. According to the Federal Reserve, “4.34% of credit card portfolios of the 100 largest banks was delinquent in the third quarter of last year, up from 4.07% in the previous quarter”.
In response to this growth of delinquent accounts with unmanageable debt, debt settlement has become a popular option. Debt settlement is the process of negotiating with creditors to settle on a reduced overall debt balance which will be mutually accepted as payment in full. Credit card debts are only covered; student loans, automobile financing, or mortgages cannot be negotiated in this manner. Consumers can arrange debt settlement themselves (there are many resources online offering advice), hire a lawyer, or use debt settlement companies.
The potential benefits of debt settlement are evident; through this process, debtors can avoid the “stigma and intrusive court-mandated controls of bankruptcy” while creditors can once again hope for their client's eventual payments.
Drawbacks exist as well. Credit reports will reflect evidence of debt settlement, thus, reducing FICO scores associated to the account holder. There is also the possibility of lawsuits from credit card companies seeking to collect unpaid balances.
Be wary of unethical business practices by some debt settlement companies. Such companies will tell consumers to stop paying monthly minimums to save enough for a lump sum payment. While claiming that the settlement will be negotiated once the sum is attained, either a large upfront fee or monthly service payments will be charged. David Johnson, senior vice president of ByDesign Financial Solutions (a non profit charity) recommends “services that charge after settlement, about 20% of the amount of the negotiated reduction in balance”.
Sources:
Birnbaum, Jane. “Debt Relief Can Cause Headaches of Its Own.” New York Times. 9 Feb. 2008. Web. 27 Aug. 2009.
<http://www.nytimes.com/2008/02/09/business/yourmoney/09credit.html>
"Debt settlement." Wikipedia, The Free Encyclopedia. 28 Aug 2009, 17:44 UTC. 28 Aug 2009 <http://en.wikipedia.org/w/index.php?title=Debt_settlement&oldid=310576811>.
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