The next method for
dealing with debt is known as debt settlement, or also called debt negotiation.
In the simplest terms, a debt settlement company works with a debtor to help
negotiate a settlement with the credit card companies for less than the full
amount owed – usually around 50 percent of the original amount. Although this
may result in a reduction of monthly payments and an overall lower balance,
anyone using this method will still pay back a significant portion of his or
her debts.
There are some
benefits to this approach for those struggling to make credit card or other
unsecured debt payments:
5 Benefits of
debt settlement (or credit card debt settlement)
1. Avoid
bankruptcy: With debt settlements, you can reduce your debt burden and pay
off bills at a monthly payment that is usually lower than you are currently
paying. The debt settlement company will negotiate with the creditors or
collection agency (CA) and offer to settle your debts for as much as you can
afford to pay. Thus, you don't need to file Chapter 7 or Chapter 13 bankruptcy
if you can afford to make some sort of monthly payment towards your debts.
2. Single payment:
Instead of paying multiple bills each month, you'll have to make a single
monthly payment to the settlement company. The monthly payments are accumulated
in a trust account in order to be paid to your creditors/CA after negotiation.
So, you can avoid the stress of paying debts at different rates and dealing
with several creditors at a time.
3. Avoid unfair
collection practices: You can avoid unfair collection practices and
harassment by debt collectors if you negotiate a settlement.
4. Eliminate
extra charges: The settlement company can try and eliminate late payment
fees, if any. Any over-the-limit fees on credit cards can also be minimized or
eliminated by way of settlement.
5. Get out of
debt quicker: In a settlement arrangement, you may be able to get out of
debt in three to five years if you keep your payments current.
However, there is a dark
side to debt settlement. Many of these negotiated amounts will appear on your
credit report as a settled debt rather than paid in full. A settled debt
is a black mark on a credit report and will pull your score down for years.
At the time of
settlement, if you fail to get a written statement from the creditor that you
no longer owe anything on the debt, they may sell the remainder to another
collection agency. In addition, any savings are reportable to the Internal
Revenue Service (IRS) as forgiven debt, which is considered a form of income.
Collection agencies and creditors are required to submit a Form 1099-C to the
IRS to report any forgiven debt of $600 or greater. Most debt settlement or
debt negotiation companies will fail to inform you of this potential tax
liability.
If you seek the aid
of a debt settlement company, be very careful because you may have even more
problems than you started with. Debt settlement companies charge substantial
up-front fees, often charge monthly fees and send nothing to your creditors
until you have accumulated enough to settle. At that point, they even take a
portion of the forgiven debt as a fee.
Once your debts have
accumulated additional interest over time, and factoring in the increased taxes
you must pay on forgiven debt, you really are not saving much money at all.
Debt settlement companies cannot do anything more than you can do on your own.
If you can save money for a settlement and negotiate a settlement amount, then
you can settle your own debts without the assistance of a debt settlement
company.
If you still think
you want to hire a debt settlement company, consider the negative ratings of
debt settlement companies as well as the warnings from top regulators against
dealing with debt settlement companies:
New York Attorney
General Andrew Cuomo‘s office recently advised that ―many consumers would be
more successful working directly with their creditors. Debt settlement is
sometimes an imperfect option when you handle it yourself, but it rarely is
worth it to hire a company that claims to settle your debt for you. The
consequences (fees, judgments and ruined credit) are just too severe. The truth
is that creditors have no legal obligation to settle. Creditors despise debt
settlement companies because they actually reduce the amount of money that they
typically receive from debtors that have defaulted on debt.
Traditional
Debt Settlement Does Not Work
There used to be
about 20 debt settlement companies in the United States. There are now closer
to 2,000. They sprang up after the federal law changed in 2005, making it
harder to qualify for bankruptcy, and they have proliferated in this down
economy. ABC News reported that debt settlement customers are furious that
their bills grew while enrolled in a settlement program. Most quit the programs
without having a single debt settled. - July 24th,
2009
In the course of
their investigation the reporter wrote:
―We visited Credit
Solutions of America, the largest debt settlement company in the country. At
its Dallas-area headquarters, we saw employees ringing bells and cheering every
time they persuaded a credit card company to settle somebody's debt for less than
what they owed. When we visited with our cameras, the noise was deafening. But
thousands of unhappy customers have complained about the company.
―(A customer
named Karen) Moore signed up, and said that the first thing Credit
Solutions told her to do was stop paying her credit card bills, which,
according to a study by the National Consumer Law Center, is standard advice in
the debt settlement world. Instead, Moore said the company told her to save a
chunk of money that could be used to make an offer to the credit card companies
to settle her debts once and for all.
But that savings
account didn't accrue fast enough, Moore said, because, in the meantime, Credit
Solutions was automatically deducting its own fee -- 15 percent of Moore's
total debt -- from her account. In the first three months, the company deducted
roughly a third of the fee from her bank account and then the ensuing balance
over the course of the next 14 months.
Moore remained in
the Credit Solutions program for 20 months, and paid the company's full
15 percent fee, yet Credit Solutions did not initiate a single debt
settlement for her. And because she wasn't paying her credit card bills,
the late fees and penalties piled up, causing her debt to soar from $13,000
to $18,000. Meanwhile, her credit score plunged. "I'm out of pocket
$2,088," Moore said. "And nothing to show for it." She said it's
money she could not afford to lose given that she was in debt in the first
place. "Absolutely not. Who can afford to lose money?" she said.
While the ads and
sales pitches for debt settlement sound good and give many people who are
buried in credit card debt some hope, it is a false hope. While they all tout
the ability to reduce debts by 50% or more, reduce your monthly payments and
get you out of debt quickly, the reality is far less rosy. The preceding story
is not an isolated incident; in fact it reflects the reality of most debt
settlement programs.
The Inside
Story
The basic strategy
these firms employ is to instruct consumers to stop paying creditors once they
join the program. Instead, they are told to save money in a separate account
that will be used to make a settlement offer at some point in the future. After
receiving nothing for many months, the settlement companies say, lenders will be
happy to take a lump sum payment for far less than the total debt. Sometimes it
works but again the creditors are under no obligation to accept a reduced
settlement amount and if they can‘t get payments can seek legal remedies such
as lawsuit.
The problem for
consumers is that high up-front fees -- and additional monthly fees -- often
mean they have very little to offer creditors after six months or a year in the
program.
Big Fees,
Small Benefits
Hardy, the former
debt settlement worker, said debt settlement companies rack up charges against
consumers in numerous ways. For example, he said, while the money saved for
eventual debt repayment is held in an outside bank account, there are often
fees associated with that. These companies typically charge a monthly service
fee of $20 to $40 on these bank accounts for doing absolutely nothing. After
all the fees are added up, there's often very little benefit to the consumer --
even if the credit card company agrees to a 50-cents-on-the-dollar offer, he explained.
A consumer with $10,000 in debt would eventually pay nearly $4,200 in fees by
the time commissions; up-front charges and bank account charges are added in.
After paying $5,000 to the creditor, the consumer‘s savings amount to only
about $800, he said. And don‘t forget the imputed income tax that the IRS will
assess on the $5,000 in debt forgiveness – at a 15% tax bracket that is another
$750 reducing the real savings down to only $50!
A typical debt
settlement ad promises much but in truth they will deliver very little. Don‘t
be fooled by these types of offers – you will only enrich them and will be no
better off, or perhaps even worse off, than you were before.
New
Regulations for Debt Settlement Companies
Due to the abuses
that have been rampant in the debt settlement industry, the Federal Trade
Commission has taken action to clamp down on many of the practices we have just
discussed by issuing amendments to the Telemarketing Sales Rule. Starting on
October 27, 2010, for-profit companies that sell debt relief services over the
telephone may no longer charge a fee before they settle or reduce a customer‘s
credit card or other unsecured debt.
The Federal Trade
Commission announced on July 29, 2010 that the new restrictions are a crack
down on the debt settlement industry, which flourished during the economic
downturn as borrowers struggled to pay bills. Debt settlement companies will
now only be able to charge a fee once a customer's debt has been reduced,
settled or renegotiated. ―At the FTC we strive every day to make sure America‘s
middle class families get straight deals for their dollars, Chairman Jon
Leibowitz said. ―This rule will stop companies who offer consumers false
promises of reducing credit card debts by half or more in exchange for large,
up-front fees. Too many of these companies pick the last dollar out of
consumers‘ pockets – and far from leaving them better off, push them deeper
into debt, even bankruptcy.
Since the start of
the recession, the Better Business Bureau has received more than 3,500
complaints about debt settlement companies. Customers complained that they
ended up deeper in debt or were sued by creditors after failing to make
payments. The bureau did not separately track complaints against the industry
prior to the recession.
Debt settlement
companies often charge an upfront fee, typically a percentage of the customer's
outstanding balance. In exchange, the company promises to negotiate with
creditors to reduce or eliminate the debt, sometimes by as much as half.
The new FTC
regulations also require debt settlement companies to disclose to customers how
long it will take to get results, how much it will cost, and any negative
consequences that could arise from the process.
Specifically, the
three other Telemarketing Sales Rule provisions to take effect on September 27,
2010, will:
- require debt
relief companies to make specific disclosures to consumers;
- prohibit them from
making misrepresentations; and
- extend the
Telemarketing Sales Rule to cover calls consumers make to these firms in
response to debt relief advertising.
For example, debt
settlement companies will now have to inform customers that they can go deeper
into debt when they hire a debt settlement company. This is because customers
stop making payments on their loans, and late fees and interest charges
continue piling up.
Customers are also
often required to start setting aside money in a separate account maintained by
the debt settlement company. This money is intended to eventually pay off any
remaining debt Under the new rule, however, companies will only be able to
require such an account if it's maintained at an independent financial
institution under a customer's name. The customer must also be able to withdraw
the money at any time without penalty.
The amendments to
the FTC's telemarketing sales rule apply to any debt relief companies that sell
services over the phone. They do not apply if the initial contact is in person,
or if the services are rendered entirely online.
The new rule will
cover the vast majority of the debt settlement industry, however, because most
companies use TV and radio ads to advertise toll-free phone numbers for
customers to call, said Allison Brown, an attorney with the FTC.
The Final Rule covers
telemarketers of for-profit debt relief services, including credit counseling,
debt settlement, and debt negotiation services. The Final Rule does not cover
nonprofit firms, but does cover companies that falsely claim nonprofit status.
Over the past decade, the FTC and state enforcers have brought a combined 259
cases to stop deceptive and abusive practices by debt relief providers that
have targeted consumers in financial distress. Click here to continue reading on Debt Settlement...
No comments:
Post a Comment