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Debt Settlement
Debt settlement is one debt help choice that consumers have access to in order to achieve financial freedom. Debt settlement is a form of debt consolidation in which negotiators contact your creditors and settle your accounts for a significantly lower amount than the total debt on your balances. The goal is to drastically reduce the overall amount owed to the creditors and essentially eliminate the debts as swiftly as possible. While debt settlement may not be the best debt help choice for every debtor, it has proven to be a very successful option for those who are the right fit. The following questions and answers segment provides consumers with an ample amount of information regarding the intricacies of debt negotiation and how the process works.
Q: Is debt settlement legal?
A: Yes, it is a completely legal form of debt consolidation. In fact, many lawyers operate in this space to begin with. That said, there are a few things that should clue you in the company you working with is doing something illegal:
1. They guarantee specific settlement percentages - This is different from a money back guarantee. This pertains to sales consultants and companies that promise specific results from enrolling in their negotiation service, which is impossible since every situation is unique and results do vary.
2. They guarantee a specific credit score upon completion of their service – Again, this is impossible to do due the unique nature of every person’s situation.
3. They guarantee they will stop all creditor calls – Inevitably, during the course of a debt settlement program you will receive calls from your creditor or the collection agency who has been assigned your account. Sure, these calls can be minimized, but guaranteeing how your creditors will treat your enrollment in a settlement service is impossible.
4. They guarantee you won’t be the target of legal action – Again, no one can completely predict how your creditors will react to your enrollment in a settlement program, and legal action is always possible, though not as likely as one would assume.
Q: Who regulates debt negotiation companies?
A: The FTC works to ensure that companies operate with no unfair or fraudulent motives or practices, but it is still a relatively under-regulated industry. Another way you can check out the credibility of companies in the settlement industry is to see if the company is a member with the Better Business Bureau (BBB) . You can also see how many complaints have been filed through the BBB about a particular company. In addition, check to see if the settlement company is a member of the Trade Association of Settlement Companies (TASC), which is an organization that sets standards for the settlement industry. You can check out both the BBB and TASC online.
Q: How exactly do credit settlement programs work?
A: Typically clients are set up on a monthly payment program. That payment, which is significantly lower than your monthly minimums you are most likely paying your creditors, is made into a savings account that is set up your name. As the funds accumulate in that account and your accounts age, negotiators contact your creditors and eventually settle your accounts for roughly 40-60% of the total outstanding debt. Once each account is settled, you are ready to graduate from the program financially debt free and begin re-establishing a positive payment history.
Q: How can I enroll in a settlement program?
A: The first thing to do is contact the company you are interested in with your account information to see if you qualify for their program and also receive any advice you may need. Once that information has been analyzed, companies are able to provide you with a firm estimate of a monthly payment, the total cost of the program, and how much they can potentially save you. If you are comfortable with those figures, at that point you are typically sent a contract and additional paperwork that is to be signed and sent back along with your recent account statements. Once the credit card debt negotiation company receives the paperwork back, you can be officially enrolled in the program and negotiators can begin contacting your creditors. In addition, the company will at that time give you advice on what you need to do while enrolled in their program.
Q: Who qualifies for settlement help?
A: People are usually qualified based on the amount they owe, but some of the better companies go beyond that and factor in who a consumer owes, what their recent account activity is like, and what state they are from.
Q: What states qualify for a typical debt arbitration assistance?
A: This varies quite a bit because of law changes, how much the agency charges, and whether or not the negotiations are done by a lawyer, so check with the consumer protection division of your state, but the following states may qualify for a debt settlement program: Maine, New Hampshire, Vermont, New York, Massachusetts, New Jersey, Connecticut, Maryland, Virginia, Pennsylvania, South Carolina, Georgia, Florida, Mississippi, Alabama, Louisiana, Tennessee, Kentucky, Missouri, Ohio, Indiana, Illinois, West Virginia, Delaware, Rhode Island, Michigan, Wisconsin, Nebraska, Alaska, Iowa, Montana, North Dakota, South Dakota, Minnesota, Washington, Oregon, Nevada, California, Arizona, New Mexico, Texas, Oklahoma, Wyoming, Colorado, Utah, Arkansas, and the District of Columbia
Q: Are some states considered to be more favorable than others in terms of using a debt reduction program?
A: Yes. Texas, Florida, Pennsylvania, Arkansas, Iowa, South Dakota, and Oklahoma have very favorable state debtor laws that can protect debtors from wage garnishments and/or liens on their property.
Q: Is there a minimum amount of debt I must owe to qualify for a negotiation program?
A: Some companies do set a minimum amount of debt to qualify a potential client. The industry average falls roughly around 10,000 dollars in debt as the minimum amount that must be owed in order to qualify. In some instances, potential clients may be enrolled who have 5,000-7,500 dollars in debt and have creditors who are favorable to work with.
Q: How much can a settlement program save me?
A: Typically negotiators are able to settle each account for 40-60% of the total outstanding debt that you owe. Keep in mind, if you have circumstances where settling is difficult, the amount that you can potentially save may be a lot less. On the other hand, it is possible to save even more than he amount previously mentioned if your situation is highly advantageous for settlement.
Q: How much does the average negotiations organization cost to use?
A: The industry average for a settlement company's fees is roughly 15% of the total debt amount that you owe. Since you can save anywhere from 40-60% of your outstanding debt, the cost of the program can be as low as 55-75% of what you owe in total. To get a firm estimate of a monthly payment, total cost, and how much you can save, fill out a form and PayingPaul.Com will match you with a company for a firm quote.
Q: What should I watch out for in terms of the fee structures that a company charges?
A. Beware of companies (many are settlement firms and attorneys that charge huge, up front retainer fees. There are extreme cases of lawyers that charge “set up” or activation fees of 10% of your total debt amount before you can start saving for settlement.
Q: Do most settlement companies have a money back guarantee?
A: Actually no. Always be hesitant to work with an organization who has no money back guarantee- there is always the potential to lose a lot of money with no chance of a refund if you choose to work with such a company. Some of the “money back guarantees” will refund you if you do not save a specific percentage off your balances, while others will refund you fees proportionate to the balance of an account that was unable to be settled. Other companies simply guarantee you will save money off your balances at the time you enrolled in their service.
Q: What kind of debts does the average settlement agency handle?
A: Most agencies handle only unsecured debts. These include: credit cards, medical bills, department store cards, balances from repossessions, gas cards, personal loans and accounts in collections. In addition, settlement companies typically do not handle secured debts, such as mortgages, car loans, and student loans. Very few handle payday loan debt.
Q: How long does the average settlement program last?
A: The average program length in debt negotiation varies from 12-36 months. If a company pushes you past 36 months, watch out---the likelihood of successful negotiations decreases dramatically as one prolongs how far past due they become. In general, the rule of thumb is that one should always shoot for shorter programs if their income can support this.
Q: What is the difference between settling your debt and credit counseling?
A: Credit counseling agencies set you up on a monthly payment plan over 5-6 years in which the client must pay back the entire amount of debt owed. So, they do not attempt to lower the overall amount that you owe your creditors. Rather, they will attempt to simply lower the credit card monthly payment by attacking the interest rates. Settling credit cards is the process in which professionals negotiate on your behalf and reach settlements with your creditors for a reduced amount of what you owe in total. A debt settlement program typically lasts 2-3 years and can save you roughly 40-60% off your balances, all the while you are making significantly lower monthly payments.
Q: What is the difference between credit card negotiation and debt consolidation?
A: Debt consolidation refers to the process in which an unsecured or secured loan is issued to the consumer to help pay off their debt. With secured consolidation, a consumer receives a loan that is attached with collateral, typically a car or a home, which serves as security against a situation where the consumer cannot pay the loan back. Unsecured consolidation involves a consumer receiving a loan from a bank with no collateral attached in order to pay off their outstanding debt. Credit card settlement, on the other hand, involves the process of negotiating with the client's creditors in order to lower the overall debt amount that they owe by reaching settlements with these creditors.
Q: How does settlement compare to filing Chapter 7 & 13 personal bankruptcy?
A: Chapter 7 Bankruptcy requires a consumer to liquidate all of their non-exempt property to the courts. The income generated from the sale of this property is used for paying off your debts. Chapter 13 Bankruptcy requires the consumer to follow a monthly installment plan in which their income for the next five years is dedicated to in order to pay off their debt. Negotiating debt in no way forces a client to turn over any property nor does it require a person to turn over all of their income to provide funding for the program. For consumers considering bankruptcy, it is necessary to note that if you do indeed file, this stays on your credit report for 10 years and public records for 20 years. This has a catastrophic affect on your credit, and will make future employment opportunities and loan grants extremely difficult to procure.
Q: What is the difference between debt settlement and credit repair?
A: Credit repair companies work to clear any inaccurate, negative, or unverified (within 30 days) information on your credit report that you have appealed. If the debt information is not verified by the creditor, it is wiped off of your report entirely until it is in fact verified, if ever. Negotiating credit card debt involves lowering the total debt you owe by reaching settlements with your creditors and in no way acts to aid you in the credit report appealing process.
Q: Do I need to close my credit card account once I enroll in a settlement program?
A: Yes, you should do this. Essentially, the account will read "closed by consumer" rather than "closed by lender" on your credit report. In the future, this will show banks and finance companies that you took initiative in solving your financial problems and you will be more likely to receive a loan. Additionally, this will help to ensure that you do not continue to your accounts---after all, the goal is to get out of debt.
Q: Can I keep an account open during the settlements process?
A: While settlement organizations cannot force you not to do this, the bottom line is that if you keep an account open outside of the program it will have an adverse affect on negotiations. The creditors during negotiations with will simply ask, "If they can pay off on that account, why aren't they paying off on this one?" In turn, they will be less likely to negotiate a low settlement, if any at all.
Q: What should I do if a company tells me that this does not matter?
A: If this is the case, you may want to seek out the services of another company. You can fill out a form here to get matched with a pre-qualified firm.
Q: Will my accounts get sent into collections while I am enrolled in a settlement program?
A: Yes your accounts will most likely go to collections, accounts may indeed get sent to collections while you are enrolled in a settlement program. If this happens, don't worry- this is favorable for two particular reasons. First, at that point, the collections agencies are bound by the Fair Debt Collections Practices Act (FDCPA) which settlement companies take advantage of to reduce the amount of annoying calls you receive. Secondly, these agencies buy your debt for very cheap (explain this in greater detail.also this does not necessarily happen). This means that settling for a low percentage of the debt still ensures the agency will see a formidable profit as a result.
Q: I am receiving harassing calls from my creditors. Can settlement agencies get them to stop?
A: The Fair Debt Collection Practices Act (FDCPA) states that collection agencies but not original creditors are required to contact a third party who represents a client as their Power of Attorney. Once clients are enrolled in a debt reduction program, your creditors are contacted with a Power of Attorney (the title and language may differ between companies and in some cases your creditors may not be notified at all) statement notifying them that the company now officially represents the client. They are obligated to contact the settlement company instead of the debtor.
Q: Can settlement organizations get collection agents to stop calling me also?
A: As mentioned above, there are laws that regulate what collections agencies can do in terms of contacting a debtor. For one, many of these laws protect you from illegal harassment or collections practices, as well as forbid agencies to contact you at work and put your job in jeopardy (assuming you have told them that this is the case). In addition, a lot of settlement organizations ask their clients to change their number and address to that of their own so they can deflect a lot of the calls you are receiving from collections back to them. However, one should remember that it is inevitable that you receive calls throughout the settlement process.
Q: Do I continue to make payments to my creditors while I am enrolled in a settlement program?
A: No. Typically, clients voluntarily stop making their payments to their creditors in order to fund the savings account that is set up for them in their name. If you are making your payments, creditors will find it unreasonable to reach a settlement with negotiators as they will assume you can pay off the total amount of debt you owe. Moreover, if you can afford your monthly payments it is unlikely a settlement plan is even the right consolidation service for you.
Q: Can't that affect my credit negatively while I am enrolled in a debt settlement program?
A: In the short run, yes. Also, there is more of an effect if your credit score at the time of enrollment is very high. (You've been doing this a lot.you don't capitalize "Payment History" and that stuff). Payment History makes up 35% of your credit score, so because your accounts are considered past due, it will have a negative effect on this percentage. However, “amounts owed” makes up 30% of your credit score, and once you graduate from a settlement program your debts are considered settled in full. Ultimately, because settlement is the fastest debt consolidation option for debt help, clients have the ability to bounce back quicker and start re-establishing a positive credit report upon graduation from a program.
Q: Can I apply for other lines of credit once I am enrolled in a settlement program?
A: No, you can not. If you do, it will have an adverse affect on the negotiations process and ultimately cost you a lot of money that could have otherwise been saved. Creditors will ask, "Why, if they owe so much money, were they opening up new lines of credit if they can't afford to even pay us back?" Essentially, they will assume that you can in fact pay them back and usually will refuse to negotiate or settle. In addition, the goal of any debt settlement program is to eliminate your debt. All companies should not advise opening new lines of credit because this would contradict what the goal of debt help is.
Q: Can I change the draft date that was initially assigned for my monthly payment?
A: With most companies you can. Typically they will ask you to give them notice 5-7 business days ahead of time so unwanted transactions do not go through if you are looking for a change.
Q: Why do some settlement companies set up a trust account to monitor the funds I deposit while others do not?
A: The logic behind both varies. Companies that set up the esgrow account argue that it is important that the settlement agency is active in the savings process and makes sure the client stays on the straight and arrow during the program because many clients have had problems with moneyin the past.
Q: What do I do if the accounts I owe on have a cosigner or an authorized user attached to them?
A: Don't worry- settlement companies can still enroll these accounts into a debt elimination program. If you have a cosigner for the account, then most companies will ask the cosigner to sign acknowledging that the potential risks associated with settling an account. If there is an authorized user on the account, you can simply call the creditor and have the name removed- this eliminates any chances of their credit being affected at all.
Q: Can I be sued while I am enrolled in a negotiation & settlement program?
A: Because your debts are considered past due while you are enrolled in a settlement program, your creditors do reserve the right to pursue legal action. However, this is only a last resort for the creditor. It is a time consuming and costly process that creditors prefer to avoid, but one should always keep this in mind before choosing negotiation as their debt solution. In addition, if they do pursue legal action, there are a number of steps settlement companies can still take. In some cases, they are still able to reach a settlement, just for more than the original target. If that fails, they can attempt to set you up on a monthly payment program with the creditor. While you will then have to pay off your entire debt plus interest and fees, this is far better than having a judgment executed.
Q: How does a debt negotiator decide which of my creditors to negotiate and reach a settlement with first?
This varies depending on the company. Some companies simply settle the account which is offering the lowest possible settlement, while others will attack the account(s) that have a history of having legal action pursued against them. Some debt negotiators will tackle the accounts in the order of smallest to largest.
Q: What are the tax consequences for enrolling in a negotiation program?
A: The IRS does reserve the right to tax you on whatever a debt settlement program saves you on any account with a balance greater than $600. Essentially, the IRS treats this money as income and you will issued a 1099-C . However, whether or not you can be taxed depends on solvency. To be considered solvent, your owned assets must equate to more money than the total amount of debt that you owe. If it doesn't, you are considered insolvent and all you have to do at this point is file a Form 982 proving this fact.
Q: After I graduate from a bill settlement program, can I declare bankruptcy down the road if I run into future financial problems?
A: Yes, you can still file for bankruptcy even if you have participated in any debt settlement program.
Q: Do I have any incentive at all to pay these debts off as fast as I can?
A: Yes, by all means. First, the faster your debts are settled, the faster in turn you can improve your credit score. In addition, the faster you are in and out of the settlement program, the less likely any legal issues will arise while you are enrolled. Keep in mind that the minimum payment most services set up for their clients is just that- a minimum. Experienced debt settlement companies will give advice to any client who can afford to pay more up front to do so and shorten their time in the program.
Q: Will my spouse's credit score be affected negatively by enrolling into a account settlement program?
A: If your spouse's name does not appear as a cosigner or authorized user on the account, then her credit will not be affected at all. If your spouse is a cosigner, make sure the settlement company you are working with sends a waiver for him or her to sign acknowledging that their credit may be affected negatively. If your spouse is an authorized user, you can simply contact the creditor and have his or her name removed from the card before enrolling into a settlement program. As a result, his or her credit will not be affected adversely. Keep in mind, however, that in community property states like Texas, California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin.
Q: Can I take out a home equity loan or refinance to finance my savings account for a debt settlement program?
A: While it is not required, most debt settlement organizations actually encourage their clients who have the ability to take out a second mortgage or refinance their home to fund the program to do so. In this case, the organization will use the money from the loan or refinancing to settle once they have reached an agreement with the creditor for an amount that is significantly lower than what you owe in full.
Q: Why shouldn't I just consult a law firm?
A: There are several reasons why consulting a law firm is not in your best interest. To start, rarely are the settlement lawyers in your state, so they can't represent you anyway if it ever went to court. Given the fact that they usually charge much higher fees, there is no real advantage, especially since the actual attorney doesn't necessarily negotiate your accounts. It may still be handled by someone with the qualifications of a regular debt negotiator except you'll be paying the price of having a lawyer handle your case. More importantly, unless the firm specializes in only debt settlement, the people working your case will not have a thorough understanding of the internal policies of the creditors they are negotiating with, and will therefore struggle to reach optimum settlements and save you the most amount of money possible.
Q: What happens if I can't make my monthly payment during a negotiation plan?
A: Essentially, if you can not afford to make the payment on a given month, most settlement companies will ask that you give them a heads up in advance. However, this is not an ideal situation. If you miss monthly payments , then the necessary funds will not be available in your savings account when the negotiators working on your behalf are ready to reach a settlement with your creditors. If the company does not have access to the necessary funds, the potential to settle is not there.
Q: Is debt settlement legal?
A: Yes, it is a completely legal form of debt consolidation. In fact, many lawyers operate in this space to begin with. That said, there are a few things that should clue you in the company you working with is doing something illegal:
1. They guarantee specific settlement percentages - This is different from a money back guarantee. This pertains to sales consultants and companies that promise specific results from enrolling in their negotiation service, which is impossible since every situation is unique and results do vary.
2. They guarantee a specific credit score upon completion of their service – Again, this is impossible to do due the unique nature of every person’s situation.
3. They guarantee they will stop all creditor calls – Inevitably, during the course of a debt settlement program you will receive calls from your creditor or the collection agency who has been assigned your account. Sure, these calls can be minimized, but guaranteeing how your creditors will treat your enrollment in a settlement service is impossible.
4. They guarantee you won’t be the target of legal action – Again, no one can completely predict how your creditors will react to your enrollment in a settlement program, and legal action is always possible, though not as likely as one would assume.
Q: Who regulates debt negotiation companies?
A: The FTC works to ensure that companies operate with no unfair or fraudulent motives or practices, but it is still a relatively under-regulated industry. Another way you can check out the credibility of companies in the settlement industry is to see if the company is a member with the Better Business Bureau (BBB) . You can also see how many complaints have been filed through the BBB about a particular company. In addition, check to see if the settlement company is a member of the Trade Association of Settlement Companies (TASC), which is an organization that sets standards for the settlement industry. You can check out both the BBB and TASC online.
Q: How exactly do credit settlement programs work?
A: Typically clients are set up on a monthly payment program. That payment, which is significantly lower than your monthly minimums you are most likely paying your creditors, is made into a savings account that is set up your name. As the funds accumulate in that account and your accounts age, negotiators contact your creditors and eventually settle your accounts for roughly 40-60% of the total outstanding debt. Once each account is settled, you are ready to graduate from the program financially debt free and begin re-establishing a positive payment history.
Q: How can I enroll in a settlement program?
A: The first thing to do is contact the company you are interested in with your account information to see if you qualify for their program and also receive any advice you may need. Once that information has been analyzed, companies are able to provide you with a firm estimate of a monthly payment, the total cost of the program, and how much they can potentially save you. If you are comfortable with those figures, at that point you are typically sent a contract and additional paperwork that is to be signed and sent back along with your recent account statements. Once the credit card debt negotiation company receives the paperwork back, you can be officially enrolled in the program and negotiators can begin contacting your creditors. In addition, the company will at that time give you advice on what you need to do while enrolled in their program.
Q: Who qualifies for settlement help?
A: People are usually qualified based on the amount they owe, but some of the better companies go beyond that and factor in who a consumer owes, what their recent account activity is like, and what state they are from.
Q: What states qualify for a typical debt arbitration assistance?
A: This varies quite a bit because of law changes, how much the agency charges, and whether or not the negotiations are done by a lawyer, so check with the consumer protection division of your state, but the following states may qualify for a debt settlement program: Maine, New Hampshire, Vermont, New York, Massachusetts, New Jersey, Connecticut, Maryland, Virginia, Pennsylvania, South Carolina, Georgia, Florida, Mississippi, Alabama, Louisiana, Tennessee, Kentucky, Missouri, Ohio, Indiana, Illinois, West Virginia, Delaware, Rhode Island, Michigan, Wisconsin, Nebraska, Alaska, Iowa, Montana, North Dakota, South Dakota, Minnesota, Washington, Oregon, Nevada, California, Arizona, New Mexico, Texas, Oklahoma, Wyoming, Colorado, Utah, Arkansas, and the District of Columbia
Q: Are some states considered to be more favorable than others in terms of using a debt reduction program?
A: Yes. Texas, Florida, Pennsylvania, Arkansas, Iowa, South Dakota, and Oklahoma have very favorable state debtor laws that can protect debtors from wage garnishments and/or liens on their property.
Q: Is there a minimum amount of debt I must owe to qualify for a negotiation program?
A: Some companies do set a minimum amount of debt to qualify a potential client. The industry average falls roughly around 10,000 dollars in debt as the minimum amount that must be owed in order to qualify. In some instances, potential clients may be enrolled who have 5,000-7,500 dollars in debt and have creditors who are favorable to work with.
Q: How much can a settlement program save me?
A: Typically negotiators are able to settle each account for 40-60% of the total outstanding debt that you owe. Keep in mind, if you have circumstances where settling is difficult, the amount that you can potentially save may be a lot less. On the other hand, it is possible to save even more than he amount previously mentioned if your situation is highly advantageous for settlement.
Q: How much does the average negotiations organization cost to use?
A: The industry average for a settlement company's fees is roughly 15% of the total debt amount that you owe. Since you can save anywhere from 40-60% of your outstanding debt, the cost of the program can be as low as 55-75% of what you owe in total. To get a firm estimate of a monthly payment, total cost, and how much you can save, fill out a form and PayingPaul.Com will match you with a company for a firm quote.
Q: What should I watch out for in terms of the fee structures that a company charges?
A. Beware of companies (many are settlement firms and attorneys that charge huge, up front retainer fees. There are extreme cases of lawyers that charge “set up” or activation fees of 10% of your total debt amount before you can start saving for settlement.
Q: Do most settlement companies have a money back guarantee?
A: Actually no. Always be hesitant to work with an organization who has no money back guarantee- there is always the potential to lose a lot of money with no chance of a refund if you choose to work with such a company. Some of the “money back guarantees” will refund you if you do not save a specific percentage off your balances, while others will refund you fees proportionate to the balance of an account that was unable to be settled. Other companies simply guarantee you will save money off your balances at the time you enrolled in their service.
Q: What kind of debts does the average settlement agency handle?
A: Most agencies handle only unsecured debts. These include: credit cards, medical bills, department store cards, balances from repossessions, gas cards, personal loans and accounts in collections. In addition, settlement companies typically do not handle secured debts, such as mortgages, car loans, and student loans. Very few handle payday loan debt.
Q: How long does the average settlement program last?
A: The average program length in debt negotiation varies from 12-36 months. If a company pushes you past 36 months, watch out---the likelihood of successful negotiations decreases dramatically as one prolongs how far past due they become. In general, the rule of thumb is that one should always shoot for shorter programs if their income can support this.
Q: What is the difference between settling your debt and credit counseling?
A: Credit counseling agencies set you up on a monthly payment plan over 5-6 years in which the client must pay back the entire amount of debt owed. So, they do not attempt to lower the overall amount that you owe your creditors. Rather, they will attempt to simply lower the credit card monthly payment by attacking the interest rates. Settling credit cards is the process in which professionals negotiate on your behalf and reach settlements with your creditors for a reduced amount of what you owe in total. A debt settlement program typically lasts 2-3 years and can save you roughly 40-60% off your balances, all the while you are making significantly lower monthly payments.
Q: What is the difference between credit card negotiation and debt consolidation?
A: Debt consolidation refers to the process in which an unsecured or secured loan is issued to the consumer to help pay off their debt. With secured consolidation, a consumer receives a loan that is attached with collateral, typically a car or a home, which serves as security against a situation where the consumer cannot pay the loan back. Unsecured consolidation involves a consumer receiving a loan from a bank with no collateral attached in order to pay off their outstanding debt. Credit card settlement, on the other hand, involves the process of negotiating with the client's creditors in order to lower the overall debt amount that they owe by reaching settlements with these creditors.
Q: How does settlement compare to filing Chapter 7 & 13 personal bankruptcy?
A: Chapter 7 Bankruptcy requires a consumer to liquidate all of their non-exempt property to the courts. The income generated from the sale of this property is used for paying off your debts. Chapter 13 Bankruptcy requires the consumer to follow a monthly installment plan in which their income for the next five years is dedicated to in order to pay off their debt. Negotiating debt in no way forces a client to turn over any property nor does it require a person to turn over all of their income to provide funding for the program. For consumers considering bankruptcy, it is necessary to note that if you do indeed file, this stays on your credit report for 10 years and public records for 20 years. This has a catastrophic affect on your credit, and will make future employment opportunities and loan grants extremely difficult to procure.
Q: What is the difference between debt settlement and credit repair?
A: Credit repair companies work to clear any inaccurate, negative, or unverified (within 30 days) information on your credit report that you have appealed. If the debt information is not verified by the creditor, it is wiped off of your report entirely until it is in fact verified, if ever. Negotiating credit card debt involves lowering the total debt you owe by reaching settlements with your creditors and in no way acts to aid you in the credit report appealing process.
Q: Do I need to close my credit card account once I enroll in a settlement program?
A: Yes, you should do this. Essentially, the account will read "closed by consumer" rather than "closed by lender" on your credit report. In the future, this will show banks and finance companies that you took initiative in solving your financial problems and you will be more likely to receive a loan. Additionally, this will help to ensure that you do not continue to your accounts---after all, the goal is to get out of debt.
Q: Can I keep an account open during the settlements process?
A: While settlement organizations cannot force you not to do this, the bottom line is that if you keep an account open outside of the program it will have an adverse affect on negotiations. The creditors during negotiations with will simply ask, "If they can pay off on that account, why aren't they paying off on this one?" In turn, they will be less likely to negotiate a low settlement, if any at all.
Q: What should I do if a company tells me that this does not matter?
A: If this is the case, you may want to seek out the services of another company. You can fill out a form here to get matched with a pre-qualified firm.
Q: Will my accounts get sent into collections while I am enrolled in a settlement program?
A: Yes your accounts will most likely go to collections, accounts may indeed get sent to collections while you are enrolled in a settlement program. If this happens, don't worry- this is favorable for two particular reasons. First, at that point, the collections agencies are bound by the Fair Debt Collections Practices Act (FDCPA) which settlement companies take advantage of to reduce the amount of annoying calls you receive. Secondly, these agencies buy your debt for very cheap (explain this in greater detail.also this does not necessarily happen). This means that settling for a low percentage of the debt still ensures the agency will see a formidable profit as a result.
Q: I am receiving harassing calls from my creditors. Can settlement agencies get them to stop?
A: The Fair Debt Collection Practices Act (FDCPA) states that collection agencies but not original creditors are required to contact a third party who represents a client as their Power of Attorney. Once clients are enrolled in a debt reduction program, your creditors are contacted with a Power of Attorney (the title and language may differ between companies and in some cases your creditors may not be notified at all) statement notifying them that the company now officially represents the client. They are obligated to contact the settlement company instead of the debtor.
Q: Can settlement organizations get collection agents to stop calling me also?
A: As mentioned above, there are laws that regulate what collections agencies can do in terms of contacting a debtor. For one, many of these laws protect you from illegal harassment or collections practices, as well as forbid agencies to contact you at work and put your job in jeopardy (assuming you have told them that this is the case). In addition, a lot of settlement organizations ask their clients to change their number and address to that of their own so they can deflect a lot of the calls you are receiving from collections back to them. However, one should remember that it is inevitable that you receive calls throughout the settlement process.
Q: Do I continue to make payments to my creditors while I am enrolled in a settlement program?
A: No. Typically, clients voluntarily stop making their payments to their creditors in order to fund the savings account that is set up for them in their name. If you are making your payments, creditors will find it unreasonable to reach a settlement with negotiators as they will assume you can pay off the total amount of debt you owe. Moreover, if you can afford your monthly payments it is unlikely a settlement plan is even the right consolidation service for you.
Q: Can't that affect my credit negatively while I am enrolled in a debt settlement program?
A: In the short run, yes. Also, there is more of an effect if your credit score at the time of enrollment is very high. (You've been doing this a lot.you don't capitalize "Payment History" and that stuff). Payment History makes up 35% of your credit score, so because your accounts are considered past due, it will have a negative effect on this percentage. However, “amounts owed” makes up 30% of your credit score, and once you graduate from a settlement program your debts are considered settled in full. Ultimately, because settlement is the fastest debt consolidation option for debt help, clients have the ability to bounce back quicker and start re-establishing a positive credit report upon graduation from a program.
Q: Can I apply for other lines of credit once I am enrolled in a settlement program?
A: No, you can not. If you do, it will have an adverse affect on the negotiations process and ultimately cost you a lot of money that could have otherwise been saved. Creditors will ask, "Why, if they owe so much money, were they opening up new lines of credit if they can't afford to even pay us back?" Essentially, they will assume that you can in fact pay them back and usually will refuse to negotiate or settle. In addition, the goal of any debt settlement program is to eliminate your debt. All companies should not advise opening new lines of credit because this would contradict what the goal of debt help is.
Q: Can I change the draft date that was initially assigned for my monthly payment?
A: With most companies you can. Typically they will ask you to give them notice 5-7 business days ahead of time so unwanted transactions do not go through if you are looking for a change.
Q: Why do some settlement companies set up a trust account to monitor the funds I deposit while others do not?
A: The logic behind both varies. Companies that set up the esgrow account argue that it is important that the settlement agency is active in the savings process and makes sure the client stays on the straight and arrow during the program because many clients have had problems with moneyin the past.
Q: What do I do if the accounts I owe on have a cosigner or an authorized user attached to them?
A: Don't worry- settlement companies can still enroll these accounts into a debt elimination program. If you have a cosigner for the account, then most companies will ask the cosigner to sign acknowledging that the potential risks associated with settling an account. If there is an authorized user on the account, you can simply call the creditor and have the name removed- this eliminates any chances of their credit being affected at all.
Q: Can I be sued while I am enrolled in a negotiation & settlement program?
A: Because your debts are considered past due while you are enrolled in a settlement program, your creditors do reserve the right to pursue legal action. However, this is only a last resort for the creditor. It is a time consuming and costly process that creditors prefer to avoid, but one should always keep this in mind before choosing negotiation as their debt solution. In addition, if they do pursue legal action, there are a number of steps settlement companies can still take. In some cases, they are still able to reach a settlement, just for more than the original target. If that fails, they can attempt to set you up on a monthly payment program with the creditor. While you will then have to pay off your entire debt plus interest and fees, this is far better than having a judgment executed.
Q: How does a debt negotiator decide which of my creditors to negotiate and reach a settlement with first?
This varies depending on the company. Some companies simply settle the account which is offering the lowest possible settlement, while others will attack the account(s) that have a history of having legal action pursued against them. Some debt negotiators will tackle the accounts in the order of smallest to largest.
Q: What are the tax consequences for enrolling in a negotiation program?
A: The IRS does reserve the right to tax you on whatever a debt settlement program saves you on any account with a balance greater than $600. Essentially, the IRS treats this money as income and you will issued a 1099-C . However, whether or not you can be taxed depends on solvency. To be considered solvent, your owned assets must equate to more money than the total amount of debt that you owe. If it doesn't, you are considered insolvent and all you have to do at this point is file a Form 982 proving this fact.
Q: After I graduate from a bill settlement program, can I declare bankruptcy down the road if I run into future financial problems?
A: Yes, you can still file for bankruptcy even if you have participated in any debt settlement program.
Q: Do I have any incentive at all to pay these debts off as fast as I can?
A: Yes, by all means. First, the faster your debts are settled, the faster in turn you can improve your credit score. In addition, the faster you are in and out of the settlement program, the less likely any legal issues will arise while you are enrolled. Keep in mind that the minimum payment most services set up for their clients is just that- a minimum. Experienced debt settlement companies will give advice to any client who can afford to pay more up front to do so and shorten their time in the program.
Q: Will my spouse's credit score be affected negatively by enrolling into a account settlement program?
A: If your spouse's name does not appear as a cosigner or authorized user on the account, then her credit will not be affected at all. If your spouse is a cosigner, make sure the settlement company you are working with sends a waiver for him or her to sign acknowledging that their credit may be affected negatively. If your spouse is an authorized user, you can simply contact the creditor and have his or her name removed from the card before enrolling into a settlement program. As a result, his or her credit will not be affected adversely. Keep in mind, however, that in community property states like Texas, California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin.
Q: Can I take out a home equity loan or refinance to finance my savings account for a debt settlement program?
A: While it is not required, most debt settlement organizations actually encourage their clients who have the ability to take out a second mortgage or refinance their home to fund the program to do so. In this case, the organization will use the money from the loan or refinancing to settle once they have reached an agreement with the creditor for an amount that is significantly lower than what you owe in full.
Q: Why shouldn't I just consult a law firm?
A: There are several reasons why consulting a law firm is not in your best interest. To start, rarely are the settlement lawyers in your state, so they can't represent you anyway if it ever went to court. Given the fact that they usually charge much higher fees, there is no real advantage, especially since the actual attorney doesn't necessarily negotiate your accounts. It may still be handled by someone with the qualifications of a regular debt negotiator except you'll be paying the price of having a lawyer handle your case. More importantly, unless the firm specializes in only debt settlement, the people working your case will not have a thorough understanding of the internal policies of the creditors they are negotiating with, and will therefore struggle to reach optimum settlements and save you the most amount of money possible.
Q: What happens if I can't make my monthly payment during a negotiation plan?
A: Essentially, if you can not afford to make the payment on a given month, most settlement companies will ask that you give them a heads up in advance. However, this is not an ideal situation. If you miss monthly payments , then the necessary funds will not be available in your savings account when the negotiators working on your behalf are ready to reach a settlement with your creditors. If the company does not have access to the necessary funds, the potential to settle is not there.