Debt settlement is also called debt negotiation or debt arbitration. Debt settlement is a process in which a consumer's creditor agrees to accept an amount less than what is owed. Once the agreed-upon amount is paid in full, the debt is considered satisfied. But if the consumer stops making payments, the balances on the accounts will incur late fees and interest. Debt settlement is a process that any consumer can negotiate himself with his creditors. However, many turn to debt settlement companies, who will contact the creditors on the consumer's behalf, negotiate an agreed-upon amount, as well as pay the debt from deposits consumers give the company. Debt settlement companies may purport to save consumers up to 50 percent of their debt.
Fees
Debt settlement companies have different ways of assessing fees passed on to consumers, notes the National Foundation for Credit Counseling. Some companies charge a fee based on the percentage of the total debt, usually around 13 to 20 percent. For example, a consumer who owed a negotiated debt of $30,000 would pay a debt settlement company $4,500 if the company charged 15 percent in fees. Another fee structure used by debt settlement companies is to charge the consumer based on the amount of debt shaved from the original account balances. These fees are usually higher, sometimes as much as 35 percent, in which case the fee for a negotiated reduction of $15,000 would be $5,250. The NFCC notes that many companies "frontload" fees: Until the consumer pays the company the entire fee, his settled debts remain unpaid. Debt settlement companies may also charge a monthly fee for administrative services, which can range between $19 and $89.
Payment Process
Consumers make deposits into an account maintained by the debt settlement company to pay off the negotiated debt. However, the NFCC warns that some companies will tell consumers to stop making payments to creditors while debt is being negotiated, during which time the delinquent account may accrue interest and penalty fees. Consumers may end up with a debt that's substantially larger. The settlement process itself can take six months or longer, during which time a creditor may take legal action against the consumer. After debt is negotiated, the money deposited by the consumer is then used to pay it off over a long period of time. The NFCC notes that repayment generally takes between two and four years.
Effect
Negative information is not removed from the consumer's credit report after completing a debt settlement program. Once a negotiated debt is paid, it is listed as "Paid by Settlement" on the consumer's credit reports. This indicates to anyone checking the consumer's credit reports that the consumer did not pay the total debt incurred, but that the creditor agreed to accept a lesser amount. Also, if the amount waived by creditors is more than $600, consumers may have to pay income taxes on the amount forgiven.
Alternatives & Warnings
In addition to negotiating a settlement directly with their creditors, consumers have other options of handling debt. Credit counseling agencies can assist by helping consumers adhere to a budget or may recommend paying into a debt management program to fulfill their obligations to creditors. Before entering into any debt settlement agreements, consumers are advised by the FTC to research the debt settlement company's reputation by finding out if complaints against the company were filed with their state's Attorney General's Office, the Better Business Bureau and other local consumer protection agencies.
Member Comments