What is Debt Negotiation and Settlement?
This is the process of negotiating with creditors or debt collectors to settle debts for less than the full amount owed. Debt settlement is different than debt management (the consolidation of your debts with one monthly payment). There are mom-and-pop debt settlement shops; large, for-profit settlement corporations; and law offices that are set up primarily as settlement companies. There are also individual Attorneys who do settlement work on a case-by-case basis.
In these times of economic upheaval a number of debt settlement companies are advertising heavily on the Internet and on television. You may have seen some of these ads promising unrealistic and unlikely results in terms of getting rid of all of your debt. While some of these companies are legitimate, a significant number of them are not. Even in the case of a legitimate company, there are pros and cons that the consumer should be aware of. Before forking over your hard earned cash to these entities, or granting them automatic access to your bank account, do some research, get a written agreement, and read the agreement. Usually the first person you speak to on the phone is a salesman. The promises they make may be completely accurate, or they may be totally false. Read the agreement. And if there is no written agreement, you risk losing any monies you give them.
In the past, many debt settlement companies charged a percentage of total debt rather than a percentage of what they were able to save. In some cases, whether any debts were settled or not, this money was considered fully earned. Several debt settlement companies that operated on this type of model have been shut down by state attorney generals in recent years.
Also, a debt settlement or debt consolidation company may work with you to get you approved for a home mortgage refinance and use the extra monies to pay off your debt in full, or at a reduced rate, with a healthy slice going to them for their services. Before turning your unsecured credit card debt into secured mortgage debt you should consult with an experienced debt relief Attorney, preferably one who is also well educated and practiced in bankruptcy. It may be a smart move for you to refinance, or then again, depending on your situation, it may have a disastrous outcome. The debt consolidator is not the one who should advise you on this issue.
How It Works
The majority of settlement companies operate by collecting funds from you on a monthly basis. These funds go into an account and at the point that there exists sufficient money to settle an account, one or more of your creditors are contacted and negotiations begin. One important fact that you need to keep in mind is that in most cases the fee that the settlement company pays itself comes out of your monthly contribution before any monies get deposited into your settlement account. In many cases, if you change your mind about settlement in midstream, it may be difficult to get unused monies returned.
In terms of negotiation, some companies really work the account and negotiate hard to get a good settlement or lower your interest rate and payment. Others accept whatever the creditor is willing to offer and do very little, if any, work to earn the fees that you have paid them.
Many creditors have put policies in place that forbid them from working directly with debt settlement companies. Make sure you find out what happens to your fees if a creditor won’t settle with your representative.
There are other potential problems, the foremost being that depending on the size of your debt, how many creditors you have, and the amount you are able to contribute to settlement on a monthly basis, it may take years to accrue enough money in your settlement account to settle all of your debts. During this time period you may be sued, and potentially garnished. Find out if your settlement company is set up to legally represent you in the case of a lawsuit. If your company is not a law firm with attorneys licensed in your state, they can’t represent or advise you, despite what they may claim. Additionally, if your settlement company is a settlement law firm, they may be able to offer you generic advice, but may still be unwilling, or unable, to represent you personally in the case of a suit.
How Much Money Will You Save?
That depends on a number of factors: the age of the debt, the creditor, if it has been sold to a debt collector prior to settlement, if a suit has been filed, if a judgment has been obtained, and most importantly–who is doing the settlement on your behalf. There is no universal rule of thumb, but it stands to reason if a settlement company can “earn” a lot of your money with very little work, then you can expect that there will not be a great deal effort that goes into settling your account. “No effort” equals not much money saved. Then again some companies work hard and can save you up to 70% of the total amount owed. Ask for settlement statistics.
Are You a Good Candidate for Debt Settlement?
Maybe. Possibly debt settlement is an excellent option for you; possibly bankruptcy is more suited to your needs. There is really only one way to know–consult with an Attorney who is experienced in both arenas. Debt settlement, when appropriate and done well, can save you a significant amount of money. We have saved our clients tens of thousands to hundreds of thousands of dollars. Debt settlement, when not appropriate, or poorly done, can cost you an arm and a leg, and accomplish nothing positive. This is really an area where it pays to know before you go.
Can You Settle Debts on Your Own?
Yes. But there are pitfalls. The first necessary action is properly and carefully dealing with the creditor or debt collector. This is not always fun. The second is ensuring that the entity you are negotiating with really owns your debt or the right to collect and settle it. Lastly, have you ensured that the settlement itself is actually valid? We have clients who have settled their own debts only to contact us because a collector is trying to collect on the same debt already “settled”.
Just as with settlement companies, the key determining factor in a successful settlement is–who is doing the settlement? If you are a good negotiator, can handle the stress of personal contact with collectors, are well organized, and pay attention to details, you may be able to settle your debts and do a reasonably good job of it. If all these points do not apply to you, then you can probably save a lot more money with a reputable and experienced attorney handling negotiations and settlement for you; an attorney who knows the relevant laws and cannot be intimidated into a deal that could have been much better.