Hayden’s Mommy & #2 due Nov! asked:


I’m back in hope of getting some answers for my friend and her family. She is considering filing for bankruptcy, but we were discussing those companies that help you consolidate your credit card debt.

How do those “debt settlement” companies work? What is a name of a good one? Is there another way to consolidate your credit card debt? Don’t those companies let you pay less than you owe?

Sorry for the million questions! I know nothing about this topic. Thanks!

Kansieo.com

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  efflandt · January 15, 2010 at 9:15 am

  Kansieo.com

  Consolidating debt or debt settlement are two entirely different things.

  Consolidating debt is paying off small debts first and/or transferring debts to something with lower interest, or getting a loan to pay off your debts at lower interest (unlikely once you are in over your head).

  Dept settlement companies often hold your money, take their cut, not pay your bills, and then try to work out a lower settlement. The not paying your bills part trashes your credit and creditors do not have to go along with that, and may still pursue judgments against you.

  Unfortunately people do not realize until they overspend that there is no easy out.

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  Big Larry · January 16, 2010 at 6:34 pm

  Kansieo.com

  I would definitely thoroughly explore all other options before filing bankruptcy. Debt settlement is certainly one to consider.

  A debt settlement company will negotiate with unsecured lenders (such as credit cards) on your behalf. They will not help with mortgages or other secured loans. Typically, they will work out a payment plan with the credit card that will result in the lender accepting less than you owe as payment in full.

  They don’t do anything that you can’t do yourself and their fees can be as high as 30% of the savings they realize for you. However, I don’t change my own oil or cut my own hair either since I don’t have those skills, so hiring an experienced professional can be very worthwhile.

  I would recommend you check out where your friend can get a free evaluation of their situation and explore potential strategies with a debt counselor (who is likely compensated for selling them debt settlement services.)

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  Heather · January 18, 2010 at 1:40 am

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  Debt settlement should be avoided at all costs. On the surface, debt settlement doesn’t sound so bad. You pay the debt settlement company who, in turn, pays your creditors. In the end, everyone gets paid and you’re able to move on with your life. Remember the part about stopping payment to your creditors while a settlement is negotiated? That’s the part that will come back to haunt you.

  Creditors don’t typically settle debts until they’re a few months past due. That means you have to stop paying your accounts for a few months. Meanwhile, late payments are reported to the credit bureaus, your credit score drops, and you might begin receiving collection calls. The late payments will remain on your credit report for up to seven years. Until you replace the negative payment history with some positive information, you’ll have difficultly getting new credit cards and loans. You may even have a hard time getting a job or a competitive insurance rate.

  If the debt settlement company successfully settles with your creditors, the delinquent information isn’t erased from your credit report. Instead, your account is updated as “Charged-Off Settled” Or “Paid-Settled”, neither of which is as good as a “Paid in Full” account.

  After debt settlement, it may a few months or even a few years to be approved for unsecured credit.

  You could owe taxes on settled debts. The Internal Revenue Service (IRS) treats forgiven debts as income and expect you to pay income taxes on it. Creditors are supposed to send you a Form 1099-C for reporting cancelled debts, but you’re supposed to include the debt in your tax return even if you don’t receive the form.

  Debt settlement companies charge hundreds of dollars as an initial “admin fee” to set up your account, plus a monthly service fee. The fees vary depending on the company and the amount of your debts.

  Such companies take your money every month, but don’t make monthly payments to your creditors! Instead, they put it in a trust account, negotiate your debts with your creditors, then make a lump-sum payment when there’s enough in your account to pay a creditor in full.

  That can take *years* depending on the amount of debt you have with each creditor. Meanwhile, you can be sued by your creditors and your wages can be garnished! (Or just don’t make payments to your creditors. You’ll end up in the same spot without paying someone to help you get there!)

  Settlement companies don’t ask your creditors to stop all interest, late fees and overlimit fees from accruing. That means while the negotiations are ongoing, your bills will continue to grow! So if you’re sued and a judgement is brought against you, you’ll owe more money than before!

  And shoddy companies, which there are alot of, don’t tell you *any* of this up front. I call it “getting permission by ommission” because they simply don’t tell you how their program works *before* you sign an agreement with them. Or after, for that matter. But if you ask the right questions, eventually you’ll figure it out. (Or when the crap hits the fan. Whichever comes first.)

  Let me give you an example of how debt settlement works.

  Let’s say you have $20,000 in unsecured credit card debt. You owe $10,000 to one credit card company, $6,000 to another and $4,000 to a third. You agree to a 5 year plan where you pay $250 a month to the settlement company. (After all, $250 a month for 60 months is only $15,000, so you’re saving $5,000 and you’ll be debt-free in 5 years, right?)

  The admin fee will cost you $750. Your first 3 monthly payments go towards that and nothing gets put into your trust account until your 4th month.

  The settlement company keeps $50 of your $250 payment each month for the service fee. That means $200 a month is being added to your trust account.

  Most debt settlement companies claim to be able to negotiate your debt for about 50% of what you owe. So let’s use the lowest credit card debt as an example.

  If you owe $4,000 and your creditor agrees to accept $2,000 as payment in full, it will take 10 months at $200 per month to have enough in your trust account to pay off just that one credit card.

  But remember, your first 3 payments to the settlement company only paid the admin fee. That means your first credit card settlement is 14 months *after* you started sending them money.

  So what’s the problem? It’s simple. Your creditor won’t agree to accept half of your actual debt unless, or until, it can be paid in full. Otherwise, you’re expected to make your normal monthly payments.

  Since you don’t have $2,000 in your trust account, and you won’t have it until more than a year after you stopped paying your creditor directly, they’ll probably take you to court and request that your wages be garnished long before you have that $2,000 built up.

  And what about your other creditors? Well, they’ll be waiting even longer to get their money from the settlement company. The $6,000 debt will take 15 *more*

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  bobby · January 19, 2010 at 8:00 pm

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  All of the options: debt settlement, debt consolidation
  and credit counseling have their pros and cons. None
  of them is perfect – you have got to choose which one
  you like. Your credit will be hit.

  With credit counseling – you will get a note on your
  credit as “not being paid as agreed” – stays on your
  credit for 7 years. Most credit counseling companies get
  a commission from the creditors and also charge you a
  monthly fee.

  With debt settlement, you will end up paying approx
  half of what you owe. If you go with a good one, you will
  be legally defended by the attorneys…

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  1939 · January 23, 2010 at 7:53 am

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  Don’t do that
  Have her Google CCCS and then her city or a large city near where she lives. She needs credit counseling. Debt settlement basically takes money from you then says they can negotiate a settlement for you…credit card companies do not have to agree to any settlement…it can be a fast track to getting sued.