By Wendy Clay on November 23, 2011
.jpg.aspx?width=75&height=75) Debt settlement, also referred to as debt negotiation, can hasten the debt elimination process and provide an alternative to bankruptcy for those who do not have the requisite home equity to obtain a secured debt consolidation loan. Unlike debt consolidation and credit counseling, debt settlement focuses less on consolidating debt payments into a single monthly payment or helping borrowers develop effective budgets to aid in debt management and more on helping borrowers reduce the amount owed to their lenders to enable them to pay off their debt in the shortest period of time possible, preferably in one lump sum payment. Debt settlement negotiations often result in a 40-60% reduction in debt amounts for debts such as credit cards, unsecured personal loans, unsecured personal lines of credit, those controlled by collection agencies, automobiles in repossession, and medical bills, but home loans, mortgages, auto loans, student loans, government loans, lawsuits, IRS debts, taxes, and other types of secured debts can not be negotiated.
When considering debt settlement there are many questions to contemplate a few of which include: what represents a practical settlement amount; can your budget accommodate a lump sum payment for the settlement amount, and if not should you stop making payments on that debt to save funds for a lump sum payment or make plans to negotiate a repayment plan along with the settlement; and if you intend to negotiate a repayment plan, what is the shortest amount of time you could fully repay the settlement amount. These represent a few of the issues one must tackle during the debt settlement process, and doing so without aid is possible, but can be very difficult without adequate information on one’s rights as a borrower or experience negotiating with creditors. For this reason, there are many agencies that exist for the sole purpose of assisting borrowers in the debt settlement process. These agencies offer their services for a fee that is based on either the percentage of debt forgiven, the total amount owed, the number of debts to be settled, or the amount the debtor will save through settlement. In some situations these fees can be very hefty, but worth it because of the knowledge and expertise the agency provides and the results they are able to attain.
While there are many reputable agencies out there, there are also many scammers. Before deciding on a debt settlement agency it is important to do some background research. According to the Federal Trade Commission legitimate debt settlement companies:
- Do not guarantee results or make empty promises such as ensuring clients that they will not be sued by their creditors.
- Do not accept clients that will not be capable of repaying their debt regardless of how much is forgiven, and require accepted clients to commit to saving money to fund their settlement.
- Have written polices and procedures regarding their debt settlement programs and make these policies and procedures, as well as the fees associated with the program, available to prospective clients before beginning the debt settlement program.
- Are members of their local Better Business Bureau.
- Have an established process for resolving and reviewing customer disputes, and again make this information accessible to clients.
- Have in-house attorneys with substantial experience dealing with the credit industry.
- Do not refer clients to third parties for any portion of the settlement process.
- Inform customers of the taxability of their forgiven debt amounting to $600 or more by the IRS.
- Do not directly handle their clients’ money to avoid embezzlement and fraud.
- Negotiate with creditors on a continuous basis and have their customers approve of all settlement offers before accepting them.
Along with these guidelines from the FTC, you should also be wary of agencies that: do not belong to the Association of Settlement Companies; pay their counselors on commission rather than by performance; do not have a money-back guarantee; and lack experience.
Once you have taken these qualities into consideration and decided on a settlement agency (or to do the settlement on your own) you are ready to begin negotiations. On a final note, debt settlement represents a great solution to overwhelming debt and has many benefits, but it also carries some negative consequences. Before making the final decision to undergo debt settlement negotiations be sure to thoroughly research prospective debt settlement companies and understand that fraud can still occur since the industry is laxly regulated; evaluate the impact settlement will have on your credit score if you stop paying bills before the settlement or are unable to pay the settlement; realize that your creditors may threaten you with lawsuits or you may face wage garnishments; and acknowledge that the debt settlement process will be lengthy and potentially costly.
Sources:
Debt Negotiations. 3 June 2009. Web. 2 Nov. 2011 <http://www.debtnegotiations.com/2009/06/debt-
negotiations/>.
Debt Settlement Solutions. 10 June 2009. Web. 2 Nov. 2011
<http://www.debtsettlementsolutions.com/2009/06/debt-settlement-solutions/>.
Weston, Liz When Debt Settlement Makes Sense. MSN Money, 22 Sep. 2010. Web. 2 Nov. 2011
<http://money.msn.com/credit-and-debt/when-debt-settlement-makes-sense-weston.aspx?page=0>. |