If you’ve ever been maxed out on your credit cards, falling further behind in the payments and feeling more overwhelmed with each passing day, you might have been contacted by a company wishing to offer you a settlement. Before you agree to a credit card debt settlement, there are a few things you need to know.
What They Are
Debt settlement programs are usually the first option many consumers choose. They’re tempting because they’re touted as being a go-between for consumers and credit card companies and for those struggling with endless phone calls and mailboxes that always have threatening letters, it can seem like an opportunity to lift that burden. They work by negotiating on your behalf with your creditors, especially credit card companies, amounts that are less than what your balances are reflecting. You’ll have to make a monthly payment and usually the company will want a separate account set up. It then withdraws those funds and makes the agreed upon payments each month.
The catch is that if you fail to make a payment – even one – you could jeopardize the repayment plan and that could mean that you’re back owing the same amount you did before entering the program. Plus, many companies require there be a certain percentage placed into the account before it even begins making those payments on your behalf (it’s part of the agreement it comes to with the creditors). You could forfeit that money already in the account if you miss a payment. The FCC encourages consumers to ensure they can meet the financial obligations every month before entering into one of these programs. Also, if your debt is primarily credit cards, you can also contact your card companies on your own behalf and negotiate a repayment plan.
Also, not all credit card companies and other creditors will be willing to accept a reduced payment. That means you may have other debts you’re still paying on aside from the monthly payment to the settlement company. It could be too big a risk for your finances.
Percentages, Penalties and Payments
While you’re adding to the account each month, the settlement company is likely paying off the smaller debts. Many operate on a percentage table, meaning smaller debts are earning them smaller amounts each month and the larger debts are often saved until the end. This means you’re paying more to the companies over the course of the program.
A company is only allowed to charge a portion of its total fee for the debts it settles. If, say, you agree to pay $100 and you have four accounts you want to include in the repayment plan, and it secures a plan with your Visa credit card, it can only charge the portion of the fee that is in line with that particular account. If, a month later, it negotiates a plan with your Discover credit card, it can then charge the fee applicable to that account. Each time the debt settlement company you’ve chosen is able to settle another debt with one of your creditors, it can then charge you another portion of its full fee. If the company’s fees are based on a percentage of the amount you save through the settlement, it must tell you both the percentage it charges and the estimated dollar amount it represents. This is sometimes what’s referred to as a contingency fee.
Credit Could Still Sink
There are no guarantees your credit scores won’t sink. There are also no guarantees that the late fees won’t continue to grow and because consumers often assume they no longer have to keep contact with their creditors and believe the debt consolidation company is, there could be a lot of less than ideal repercussions. Not only that, but your creditors could sue you anyway – even if you’ve been under the assumption that they’ve agreed to the payment plan. And if they do sue, they could garnish your wages or even place liens on your assets.
Scams and Red Flags
There are no shortage of scams, either. Many of these companies use deceptive advertising and marketing. Others will operate for awhile and then you’ll hear nothing else from them. When you try to contact them for an update on your status, you might hear a disconnect notice at the other end of the phone line and a website that’s no longer live. The FTC also warns consumers that some will pad their own coffers before they even begin to use your money to pay your creditors. This is illegal and if that happens to you, you should contact the FTC.
There are plenty of red flags to look out for, too. First up, you should never agree to a plan that charges fees before it begins paying you debt. The FTC is very specific about those who insist there are “new government programs” to bail consumers out of their personal credit card debt. Also, no company can guarantee your unsecured debt will be wiped out. In order to ensure you’re always aware of your own situation, any company that encourages you to to not communicate with creditors – and especially if the company doesn’t warn you of the potential repercussions like lawsuits and garnishments – should be avoided. Finally, don’t fall for the “pennies on the dollar” promise.
It’s absolutely crucial that you conduct research on any company you’re considering. Remember, it might be that you’re better off negotiating with your creditors on your own. No credit card company wants to see a customer default and you’d be surprised at how willing they are to work with you in difficult financial times. You might still cause damage to your credit scores, but you’re not relinquishing your power to a third party and you’re also made aware of all of the dynamics when you communicate with your own creditors.
You can check your state’s attorney general and the Better Business Bureau for any signs about the way a debt consolidation company conducts its business. This is where you’ll discover if there are complaints or even legal actions taken against any company. You’ll also want to be sure a particular company is licensed and if it is, whether it’s licensed in your state. Different states have different laws that govern these types of businesses. Of course, there’s the tried and true Google search. The FTC recommends using the word “complaints” or “deceptive” in your search.
Other Tips for Credit Card Debt Settlement
Before you enter into any kind of agreement, be sure you know the terms and conditions, the price – including how the fees are calculated, what happens if one or more of your creditors decline to participate and what happens if you miss a payment. Be sure, also, to get in writing the expected timeframe for completion. You don’t want to go into something with an indefinite completion. Be sure too that you get in writing assurances that the company won’t withhold any of your money for any reason if the plan ceases. You’ll want to choose a company that you’re confident in contacting and that you don’t feel like you have to chase down in order to get questions answered.
Finally, be sure you know how to handle the tax implications, if there are any. It could be that the money you save is taxable, so make sure you understand all of those legalities. A credible company will be able to explain it and then point you in the right direction so that you can verify that accuracy of information.