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Difference Between Debt Negotiation, Debt Settlement

Debt Settlement and Debt Negotiation - What is the difference?

Last Updated: July 12, 2016

Many people are confused by the range of programs which proclaim you can get out of debt. There is debt settlement, debt negotiation, and consumer credit counseling. In most people's minds, all these are the same and all they are really concerned about is getting out debt in the quickest and easiest way they can find. But, these methods of erasing debt are not the same. We're going to explain the difference between debt negotiation companies and how their operations are different from debt settlement companies. By the way, in case you're thinking we are advocating debt settlement firms, this is not the case. We are only explaining the difference.

What's Wrong With Debt Negotiation

Many of the nasty practices by these companies are now illegal, per the FTC regulations put into effect in 2010. However, we are going to keep posting their old tricks so you can recognize them if you see them in a firm you've hired to settle your debts. Notes regarding the new laws will be in blue font.

Setting Up Unsecured Trust Accounts

Debt negotiation companies will try and set up a "trust account" for you - though they are not a licensed bank entity under the Federal Reserve. They will also try to collect a monthly fee to maintain this account. On top of these fees, they will 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. Your creditors are not told of your arrangement with the debt negotiation company. Illegal per the new laws. All monies must be put into an FDIC insured bank account.

Debt Negotiation Companies Don't Consider Your Current Financial State

Consumer Credit Counseling Services (CCCS) will make you qualify financially for their program. Unlike CCCS, a debt negotiation company doesn't qualify you for the amount of the payments vs. debt. As a result, you can wind up paying very little towards principal of the debt on each payment effectively stretching out the payments for years. The longer you are in the program, the more money they make in their "monthly admin" fees. Per the 2010 laws, the firm has to give you a good faith estimate showing you the length of time you'll be in the program based on your ability to pay.

No Protection From Lawsuits

Even if the debt negotiation programs are run by lawyers, these programs offer you no legal protection. 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.

There are some credit card companies who are aggressively 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.

Interest and Fees Are Not Negotiated

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. Per the new laws, the firm has to has to disclose the total amount you have to pay per their past history with an individual creditor.

Only Credit Card Debt Qualifies

You can't negotiate anything that is a secured debt, like an auto loan or mortgage. You also can't negotiate down student loans, tax liens or judgments.

Fees Are Usually Paid Upfront

Usually your first 2 to 4 months of payments go towards fees. There is such a high drop out rate on debt negotiation companies that these guys want to make sure they get paid first. Per the new laws, the firm cannot collect any upfront fees before they've done work for you.

Most debt negotiation companies claim to be able to negotiate your debt with the credit card companies for about 50 percent of what you owe. You must realize that after 180 days, if you are not sued, your debt gets turned over to a collection agency. The negotiation company is NOT planning on talking to the original creditor, but to a collection agency down the line who will accept debt settlement offers fairly easily. Per the new laws, the firm has to has to disclose the total amount you have to pay per their past history with an individual creditor. They can't claim "best case," but must cite average case results, including factoring in the drop out rate.

Do You Know What's In Your Contract?

Even if a debt negotiation company did clearly explain what was going on and it was in all of their documentation, we have found 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. Per the new laws, the firm has to give you a good faith estimate showing you the length of time you'll be in the program based on your ability to pay.

The U.S. Government Accounting Office (GAO) released a report on April 22, 2010 regarding widespread abuse in the debt settlement and debt negotiation industry.

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How Does Debt Negotiation Work?

Let's say the company you hire follows all the new laws to the letter. You may still be tempted to sign with them and that's your prerogative. How much money can you actually save?

You have $20,000 in credit card debt and the debt negotiation company says all you have to do is pay $300 for 3 years and you'll be debt free for about 50 percent of the debt. At $300 a month for 36 months, that is only $10,800, so you will be saving $9,200 and you'll be debt-free in 3 years. Sounds like a good deal, right? Wrong. Let's do the math.

You save: $9,200.
Debt negotiation firm makes: $600 + (34 x $50) = $2,300.

Other Dangers Of These Programs

Do-it-Yourself Debt Settlement

Again, you can do this yourself. Put away some money so you can save the 25 percent of the $20,000, you'll have enough to have be debt free in 16 months, and it will only cost you $5,000. This is not going to be a pain free process, you will still have to deal with creditors calling you, and there is the possibility that you will be sued. However, you will be enduring the same kind of telephone calls and possibility of lawsuits if you signed up with a debt relief company. 

You can do the same thing without paying a company by following these steps.

  1. Save $300 until you have about 25 percent of the total debt.
  2. 25 percent of the total is $5,000.
  3. After 16 months, you have $5,000 to settle the $20,000 debt with the collection agencies.
  4. You don't have to wait until you have the entire amount - you can settle individual debts along the way.

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