What the Difference between Debt Settlement and Debt Negotiation?
Many people are confused by the range of programs which proclaim that you can get out of debt:
Most people do not understand that each one of these programs is entirely different. Debt settlement companies set up "trust" for you - though they are not a licensed bank entity under the Federal Reserve, but hey, neither is Paypal. They also collect a monthly fee to maintain the account. On top of these fees, they ask you to put away a certain amount of money towards your debt. The idea is to create a savings account until the debt is paid off. Unlike consumer credit counseling services, they do not pay your creditors each month, they put money into your "trust". You creditors are not told of your "arrangements" with the debt negotiation company.
Also, unlike consumer credit counseling services, they don't "qualify" you for the amount of the payment you make, so you can wind up paying very little towards principal of the debt. So you can be in this kind of program for years - and the longer you are in the program, the more money these guys make in their "monthly admin" fees. In the meantime, you can be sued by your creditors, they can get a judgment against you and your wages can be garnished! This debt negotiation scenario is also unlike consumer credit counseling where they handle all calls from the credit card companies (but they are also PAYING them for you.) YOU must deal with the nightmarish phone calls.
In addition to putting yourself in danger of being sued, there is no attempt to negotiation interest or fees. So they keep piling up on you. It could mean that while you think you are doing the right thing and making payments towards your cards, your debt continues to grow. There are some credit card companies who are agressively suing non-paying customers right now, and if they decide to take you on, they will win. Being sued by the credit card company is not like being sued by a collection agency, who usually has poor documentation and no case.
Even if they did clearly explain what was going on and it was in all of their documentation, do YOU read your credit card agreements? I know I don't. Based on letters from readers, none of the debt negotiation companies explained what they were doing. All of their victims had a vague recollection that they were paying a management fee, but they had no idea that their credit cards would go into COLLECTION while they were in the program.
Let me give you an example of how debt negotiation works.
Let's say you have $20,000 in credit card debt. (They don't work with auto loans or mortgages). You agree to a 3 year plan where you pay $250 a month to the settlement company. (After all, $250 a month for 60 months is only $15000, so you're saving $5,000 and you'll be debt-free in 5 years, right?)
The admin fee will cost you $500. Your first 2 monthly payments go towards that and nothing gets put into your trust account until your 3rd month.
The negotiation company keeps $50 of your $300 payment each month for the service fee. That means $250 a month is being added to your trust account.
Most debt negotiation companies claim to be able to negotiate your debt for about 50% of what you owe. You must realize that after 180 days (6 months), if you are not sued, your debt gets turned over to a collection agency. The negotiation company is NOT talking to the original creditor, but to a collection agency who will accept debt settlement offers fairly easily.
Let's say of the $20,000 in debt, one of the cards comes to $4000. If the negotiation company gets the collection agency to accept $2000, it will take you, it will take 10 months at $250 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 13 months *after* you started sending them money.
So you say, what's wrong with that - I'm getting a good deal by saving $6000! Yeah, except almost any collection agency will accept 25% of the debt without much of a fight and many will accept 10%. And you don't have to pay and admin fee to pick up the phone or send in a debt settlement agreement. AND you can mostly make a settlement within 6 months to a year. And be debt free. Here is more about dealing with collection agencies and how they settle. It is REALLY easy to do it yourself.
Going back to the example above, if you pay them $15,000 over a 5 year time frame and they settle your debts at half of what you owed, they'll make $4500 from you. I'd call that a profit, especially since they might not have actually helped you in any way.
If you just do this yourself, put away some money so you save up 20% of the $20,000, you'll have enough to have be debt free in 16 months, and it will only cost you $4000.
The FTC Has taken steps against some of these companies. Read about it here.
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