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Debt Negotiation Programs
Debt negotiation is not the same thing as credit counseling or a DMP. It can be very risky and have a long term negative impact on your credit report and, in turn, your ability to get credit. That’s why many states have laws regulating debt negotiation companies and the services they offer.
The Claims
Debt negotiation firms may claim they’re nonprofit. They also may claim that they can arrange for your unsecured debt — typically, credit card debt — to be paid off for anywhere from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it can arrange for you to pay off the debt with a lesser amount, say $4,000.
The firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete the debt negotiation program. The firms usually tell you to stop making payments to your creditors and instead, send your payments to the debt negotiation company. The firms may promise to hold your funds in a special account and pay the creditors on your behalf.
No company can get negative information off your credit report if it is true. The only way to improve your credit is to make regular payments over time.
Tip-offs to Rip-offs
Steer clear of debt negotiation companies that:
- guarantee they can remove your unsecured debt
- promise that unsecured debts can be paid off with pennies on the dollar
- require substantial monthly service fees
- demand payment of a percentage of savings
- tell you to stop making payments to or communicating with your creditors
- require you to make monthly payments to them, rather than with your creditor
- claim that creditors never sue consumers for non-payment of unsecured debt
- promise that using their system will have no negative impact on your credit report
- claim that they can remove accurate negative information from your credit report.
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The Truth
Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. All this can quickly cause a consumer’s original debt to double or triple. What’s more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
The Internal Revenue Service may consider any amount of forgiven debt to be taxable income. This may cause a shortage of taxes paid for the year and you will now owe Uncle Sam.
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FACING A STACK of bills you can't handle? Take heart. Despite the bad marks the credit counseling industry has been receiving lately, plenty of nonprofit organizations still remain true to their founding principle: helping folks get out of debt.
TIME — AND ONLY TIME — heals all the wounds inflicted on a consumer's credit report by unpaid debt. And we're not talking a short time. Credit bureaus can list negative information for seven years. Bankruptcy information shows up for as long as 10 years.
Unfortunately, there is an abundance of enterprising scam artists eager to prey on desperate consumers by convincing them otherwise; that — for a fee, of course — promise they can wipe your slate clean faster than you can say, "Charge it."
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