Significant levels of credit card debt can accumulate following a traumatic life event, such as job loss, serious illness or catastrophic natural disaster. Household needs will not wait for an income stream to restart. The only option can be use of the credit cards to pay bills and buy food. Long periods without income can be financially devastating. The way out of the situation is different than many people assume. Giving up and filing bankruptcy is not the answer in most cases. Lending institutions realize that recent economic events have left many people wondering about other options.
Settling outstanding debts is possible when the account holder takes the initiative with the creditor. Consumer debt is a considerable drain on the personal and national economy. Government agencies have asked the creditors to come up with ways to help people who are overwhelmed with credit card debt. The result has been an entire industry of companies that were established to help people settle outstanding debts.
TRUTH ABOUT DEBT SETTLEMENT COMPANIES
For-profit debt settlement companies offer programs where a settlement agreement is made for the debtor. A lump sum payment is negotiated with the creditor to settle the entire debt. Payments are made into an escrow account until enough money is available to pay the creditor in full. During this time, the debtor will not be making payments to the creditor. In response, the creditor will call the debtor repeatedly to find out why the payments are late. The credit report will be affected after the first 30 days have passed. After a certain period of time, the debt will be turned over to a debt collection agency.
RISKS ASSOCIATED WITH DEBT SETTLEMENT
Creditors will settle for less money that the outstanding debt in the consumer's account. The accountholder must realize that there are some risks associated with seeking a settlement. Debt settlement companies would rather work with uninformed consumers. Conduct research about the process before the situation becomes dire.
Consumers should beware of some significant constraints on resolving debt through a debt settlement company.
1. The debtor is required to deposit money in a designated savings account for the 3 years, or 36 months, before the debts are settled completely. Payments are made throughout this time, but many people are unable to set aside this money and make payments. Consumers will have all of the outstanding debts, including interest, if the payments are not made every month without fail.
2. The household budget must be evaluated carefully to determine if the program is affordable.
3. Creditors are not under an obligation to agree to a settlement for less than the amount owed. The accountholder must be aware of this possibility before paying money to the debt settlement company.
4. Debtors must be aware that the debt settlement company can choose to work on the smallest debts first, which allows the large debts to grow each month.
5. Payments sent to creditors each month will be stopped at the debt settlement company's request. The creditor will send negative reports to the credit bureaus. Consumers must realize that the credit score will drop dramatically.
6. Creditors holding the outstanding balances can take extreme measures, including a lawsuit, wage garnishment and lien on the accountholder's home.
BEWARE OF SCAMS FROM FAKE DEBT SETTLEMENT COMPANIES
Na´ve consumers have agreed to stop payment on the credit card accounts while paying the debt settlement company. Illegitimate companies will collect the money and never pay the amount to the creditors. Extreme promises to settle all debts for less than half of the amounts owed should not be believed.
The consumer can be certain of a scam when a company requires significant fees to be paid up front. This practice is prohibited under the Telemarketing Sales Rule written into the Federal Trade Commission rules.
Other debt settlement companies refuse to explain the known risks associated with the programs offered including, dropping out without settling the debts, damage to the credit history and constant phone calls from debt collectors.
Debtors should refuse to sign a debt settlement agreement with any company that engages in one or more of the following practices:
- Collects fees prior to settling the outstanding debts
- Calls the company program a "new government program" designed to bail out consumers with large amounts of credit card debt
- Promises to make the unsecured debt disappear
- Guides the consumer to stop communicating with the creditors, without explaining the significant consequences associated with this action
- Promises to stop all debt collection phone calls and legal actions, including lawsuits, garnishments and liens
- Offers a guarantee to negotiate settlements for all outstanding debts for pennies on the dollar
DEBT SETTLEMENT COMPANY RESEARCH
Wise consumers know that companies in the debt settlement business must be registered in every state where business is conducted. The state Attorney General and local consumer protection agency will have information about the company. Consumer complaints are important pieces of information for anyone evaluating the honest of a debt settlement company. Each state has different regulations that apply to the debt settlement industry. Required licenses should be valid and active prior to signing the contract.
Independent searches on the company name will yield additional information. Other people will report about their personal experiences on any number of review websites. News stories will report actions taken against the company. Court records are open for review by citizens who want to know more about a company. The Federal Trade Commission has a complaint website that can be searched to find out if the company engages in deceptive or unfair business practices.
FEES ASSOCIATED WITH DEBT SETTLEMENT
Certain fees are charged legally when the consumer agrees to work with a debt settlement company.
- Third party: Money deposited in the escrow account used to repay the debts belongs to the debtor. Interest is added to the balance in the account. Account maintenance fees can be charged throughout the length of the contract. The third party account manager is responsible for transferring the funds to the creditors. Also, the fee paid to the debt settlement company is paid from this fund.
- Debt settlement: The company is permitted to collect a portion of the full fee whenever a debt is settled. Companies that attempt to collect the entire fee prior to settling any debts are out of compliance with the law. A company that is unable to settle any of the debtor's outstanding debts will not collect any money. All fees must be published in the contract offered to the debtor. A percentage and estimated dollar amount must be revealed in the documentation. The term "contingency fee" is used to describe these fees.
All debt settlement companies are required to disclose certain terms of the agreement to the consumer in the written contract agreement. Any company that refuses to provide the following information should be reported to the Federal Trade Commission.
- Price and terms: All fees, methods of payment and conditions associated with the firm's services must be revealed.
- Results: A debt settlement company cannot make wild claims about the results because the contract must contain an estimate of the time required for the specific situation. The number of months or years required before the settlement offers will be made to each credit must be included.
- Offers: The amount of money required in the escrow account prior to settling each debt must be revealed.
- Non-payment: All consequences associated with non-payment to the creditors must be explained in detail.
In addition to these major categories, the debt settlement company must state the following in writing:
- All funds in the escrow account belong to the borrower, including the interest
- The account administrator is a third party company, which means they are not affiliated with the debt settlement provider. The third-party does not receive referral fees
- The debtor can withdraw the money at any time without paying a penalty
TAX CONSEQUENCES OF DEBT SETTLEMENT
Unless the debtor is "insolvent" as described in the IRS tax code, the creditors can report the debt to the IRS as income for the debtor. The debtor would be responsible to pay additional income taxes to the federal and state treasuries in the same year.
OTHER DEBT RELIEF OPTIONS
Consumers must be aware that negotiations with credit card companies do not require a contract with a debt settlement company. There are other options for the debtor.
- Direct negotiation: An accountholder can contact the creditor and discuss repayment options. The creditor employs qualified people to handle situations where the debtor needs different repayment terms. Open negotiations can yield similar results to debt settlement company.
- Credit counselor: A reputable credit counseling organization can offer options for managing money and repaying outstanding debts. Some people will benefit from implementing a budget and attending money-management workshops.
- Bankruptcy: Only in specific circumstances should an individual declare bankruptcy. Significant damage to the credit history will be incurred. The effects last for many years, which can prevent all credit transactions for seven years.
Immediate action allows the consumer with significant credit card debt to make informed decisions. Detailed research about all possible debt relief options will prevent costly mistakes. Each situation is unique, so the consumer should explore creative approaches. Fast solutions rarely match the unique need for repaying past debts and managing money in the future.