Debt has in many ways become “The American Way” … it has become so commonplace that meeting someone debt-free is often more surprising than meeting someone with substantial debts. Once someone finds themselves in the debt trap, the question becomes ‘now what?’ Several potential options are often thrown around: using a credit counseling agency to administer a DMP (debt management program) to manage the unsecured debts, arranging lower rates/ payments directly with your creditors, bankruptcy, and debt settlement/ negotiation. If you watch much TV late at night, you are aware that advertisements for debt settlement abound – it sure sounds good – “cut your debts in half,” “eliminate your debts in ½ the time,” “drastically reduce your monthly payments,” and other amazing claims. What is the truth? How does it really work? Let’s explore the issues and realities of debt settlement as a potential option in managing one’s debts …
What is it? Simply put, debt settlement is attempting to negotiate [‘settle’] a debt with a creditor in an effort to get them to take less than the amount owed. So what is the rub? Obviously, a creditor has no reason to settle on a debt unless there is evidence that you can’t pay it back. So, if you anticipate calling your creditors when you’re current on your accounts expecting to negotiate down the balances, don’t hold your breath. The account will normally need to be past due several months (typically 6 months for most debt settlement companies to work on your behalf; some will do it within 120 days of non-payment). So, if you were to see an advertisement and call them, they will inform you to stop making payments on your accounts and then they will ride in on the proverbial white horse and attempt to negotiate the debts on your behalf. A couple points of fact: if the debt is legitimate, a creditor isn’t required to negotiate; they can refuse to accept a settlement. Realize that becoming delinquent on debts is not a sure-fire way to get out of paying the full amount owed; you don’t have that guarantee [and avoid any company making such promises]. Second, if you are delinquent on your debts, you may be as successful negotiating on your own behalf as a debt settlement company would (without the cost – typically 10% to 25% of the amount you’re being saved).
The Federal Trade Commission offers the following suggestions [steer clear of companies that]:
- Guarantee they can remove unsecured debt
- Promise debts can be paid off with pennies on the dollar
- Claim their system will let you avoid bankruptcy
- Require substantial monthly service fees
- Demand payment of a percentage of savings
- Tell you to stop making payments and communicating with creditors
- Require you to make monthly payments to them, not creditor
- Claim that creditors never sue consumers for non-payment of debt
- Promise that using their system won’t negatively impact your credit
- Claim they can remove negative information from your credit report
With that said, there may be times when approaching debt settlement as a strategy may make sense [assuming you’ve also examined other options]:
- You have enough money set aside to offer a settlement
- You are paying the debt of another without obligation (i.e., parent)
- The debts are already approaching 6 months past due
- The debts are fairly small (<$1,000) or large (>$10,000)
- The impact on your credit isn’t going to matter
- The total costs of settlement are less than what you owe
- You are “judgment proof” (your assets [if any] are exempt)
Helpful Resources:
National Consumer Law Center – (An investigation of debt settlement companies)
Federal Trade Commission – (Ads promising debt relief may be offering bankruptcy)
