Q. Can debt negotiation companies really reduce the amount owed on my debts?
A. Many consumers are all too aware of the stress that comes with mounting credit card debt. The Better Business Bureau warns over-burdened consumers to beware of companies that promise to cut their bills in half by negotiating low payoff amounts from creditors.
Debt negotiators or debt settlement companies promote their services to reduce a consumer's debt. Some debt negotiators are known to charge hefty upfront fees. Others charge fees based on the amount of debt you owe or the number of credit accounts you have, or they may charge fees based on the amount of debt a creditor agrees to wipe out.
Today, the Federal Trade Commission's Telemarketing Sales Rule prohibits companies that sell debt settlement and other debt relief services over the phone from charging a fee before they settle or reduce your debt.
While avoiding bankruptcy, debt negotiation will leave many charge-offs on your credit file, which to other creditors, and potential lenders, can look just as bad as bankruptcy. Often, a debt-negotiating company will tell you to stop making payments to creditors and to send money to them instead. The money gets placed in an account until the debt negotiator decides to make an offer to a creditor. If you are making payments to the negotiator, it can take many months before enough money is collected from you to make a settlement offer to a creditor. And, after several months of not paying your creditors, your credit will more than likely be ruined.
Here are some things to consider:
- Write-offs or charge-offs can stay on your credit report for seven years.
- Your creditors are under no obligation to work with the settlement company.
- Debt settlement companies typically try to negotiate smaller debts first, leaving interest and fees on larger debts to increase.
- You could still be sued by a creditor.
- Many, if not most, debt settlement clients drop out without settling their debts.
- Debt amounts written off may cause problems with the Internal Revenue Service, because the amount of debt that is forgiven may be viewed as income.
The BBB and FTC recommend avoiding any debt relief organization that:
- Charges fees before it settles your debt or enters you into a debt management plan.
- Pressures you into making "voluntary contributions" - another name for fees.
- Touts a "new government program" to eliminate personal credit card debt.
- Guarantees it can make your unsecured debt go away or settle it for pennies.
- Tells you to stop communicating with creditors, but doesn't explain the serious consequences of doing so.
- Tries to enroll you into a debt relief program without reviewing your situation.
- Refuses to send you free information and a copy of the contract.
If you feel you need help with your finances, visit with a trustworthy certified credit counselor - find one by contacting the National Foundation for Credit Counseling at nfcc.org. A certified credit counselor, who seeks reductions in interest charges and payments as part of an overall debt management plan, can help consumers avoid bankruptcy and ruining their credit.
Visit bbb.org for additional consumer and business tips.
Jim Winsett is president of the Better Business Bureau in Chattanooga.