Consumers in financial distress are often focused on one thing….relief. After all, the mailbox is full of collection letters, and the answering machine is filled with calls from those you owe. Money is tight, and it seems as though there’s no way out. When you are at your lowest you hear a commercial that says you can be debt-free in a matter of months. The offer that sounds so tempting may be from a debt settlement company. Is it too good to be true, or a real way out? Before you consider working with a debt settlement company take time to review the following resources on this page.
Quick and Easy Promises to Eliminate Your Debt Can Often Make Your Financial Situation Worse
Financial Fast Fact Video: Debt Settlement
- Some settlement companies advise consumers to stop paying their creditors and instead begin making deposits into a debt settlement account. Typically, the settlement company will promise to attempt to negotiate a settlement with a creditor once the consumer has accumulated enough money in the settlement account, a process that could take years, although the exact length of time will vary with circumstances. While the consumer is paying into the debt settlement account, typically no payments are being made to creditors. That means the balance on the account can continue to grow as interest and various penalty fees are charged by the creditor. As a result, many consumers find that they owe more than when they started the debt settlement program, and their credit has suffered because of the failure to make any payments to the creditors. Even worse, some consumers find themselves facing legal actions such as wage garnishment or a default judgment as a result of a debt settlement program.
How is settlement reported on my credit report?
- Generally, debts paid off as part of a negotiated settlement will show “Paid by Settlement” on a consumer’s credit report. If you later apply for new loans, the prospective lenders will know that a debt paid by settlement means that your repayment did not cover the total debt that you had accumulated, and that your creditor accepted a lesser amount.
What happens to my credit score?
- Your credit score is based on information contained in your credit report with the highest consideration given to how you repaid prior debts. If you fail to repay your debts as promised, which would include missing payments or settling debts for only a portion of what you owed, it is likely to show on your credit report and substantially lower your credit score.
What are the fees charged by debt settlement companies?
- Different settlement companies have different fee structures. One model is that the settlement company’s fee will be a percentage of your total debt. For example, if you owe $30,000 and if the settlement company charges you 15 percent of the total debt, you would pay them $4,500 in fees. Another option may be to base the fee on the amount of debt reduction the settlement company may be able to negotiate. For example, if a settlement company was able to settle an account with a $35,000 balance for $20,000, with a 30 percent fee on the difference between what was owed and the amount you actually paid, you would also have to pay a $4,500 settlement fee. Additionally, some settlement companies also charge a monthly “maintenance” fee throughout the entire debt settlement program.
How soon will the settlement company begin making payments to my creditors?
- Some debt settlement companies frontload their fees. In other words, they collect all or a significant part of their fees before any payment is made to your creditors. If you’ve stopped paying your creditors and are instead sending money to the settlement company account, that money is likely to be used to pay the settlement company fee before being used to settle your debts. It can be months after you start the settlement program before your creditors receive any payment.
Am I responsible for any part of the forgiven debt?
- Once a creditor agrees to accept a settlement it will generally end efforts to collect the original amount. However, if the amount of the forgiven debt totals $600 or more you may owe income taxes on the forgiven amount.
At a minimum, consumers considering using a debt settlement company would be wise to:
- Review the company’s record with the Better Business Bureau as well as their state Attorney General or Commissioner of Banking.
- Confirm that your debt settlement account is FDIC-insured.
- Obtain all disclosures in writing, including a good faith estimate of costs and fees associated with the debt settlement program.
- Inquire about your right to cancel the program, and to receive refunds of any money on deposit should you wish to drop out of the program.
- Be cautious about promises or guarantees that are not in writing or that seem unrealistic.
NFCC member agencies are ready to help any consumer struggling to repay debt. Trained and certified consumer credit counselors can help you evaluate the debt resolution option that is right for you. Your road to financial freedom can start today.