Credit Card Debt Settlement Facts

Credit Card Debt Settlement Facts

If you are struggling under a mountain of credit card debt, you are not alone. Credit card debt problems do not discriminate, they affect people from all areas of life. It would be very nice to be able to pay off all your credit card debts as soon as you incur them, but in reality, we know that it probably would never happen. Your debts won’t just disappear you have to take action. The good news is, you have several options to choose from, which will help you get out of debt, credit card debt settlement being one of them.

Credit Card Debt settlement is not for everyone, but it can be a good solution if your only other option is Chapter 13 bankruptcy.  It has helped millions of consumers eliminate their credit card debts. But to qualify for a debt settlement program, you have to prove to be a good candidate. If eligible, you will most likely have the opportunity to negotiate with your creditors to make a lump sum payment of a portion of what you owed, an honest and legal way to pay back your debts in a shorter period of time without having to declare bankruptcy.

Credit Card Debt Settlement

Here are answers to some of the most frequently asked questions about debt settlement, which can help you determine whether this is the right debt relief option for you.

How does the debt settlement process work?

Debt settlement programs typically are offered by for-profit companies and involve them negotiating with your creditors to allow you to pay a “settlement” to resolve your debt, usually a lump sum payment that is less than the full amount that you owe. The program instructs their clients to stop making any monthly payments to their creditors and to put money every month in a special account to accumulate enough savings to pay off the settlement.

This process will only work if the if the creditor and collections agencies, assuming that collection agencies are involved, agree to settle the debt for less than the full balance owed. Lenders would prefer to take what they can get in a settlement than to force the customer into bankruptcy where they would end up with little or nothing.

Debt settlement has proved to be an excellent solution for many people because, in most of these cases, consumers end up savings thousands of dollars, allowing them to become debt free in less time than they otherwise would have.

Credit card debt is the most common type of debt handled through the debt settlement process because credit card debt is unsecured debt, which means that there is no property securing it like a mortgage or a car loan.

The key to a successful credit card debt settlement process is finding an honest debt settlement company with lots of experience and lots of successful outcomes.

Should I pay a debt settlement company up front?

Consumers should not pay any fee up front for debt relief services because of a ruling by the Federal Trade Commission (FTC), banning the practice. Upfront costs used to be a major issue in the debt settlement industry. Companies were charging for services that they had not delivered and in some cases kept the money without ever settling the debt. So, in February 2010 the FTC, acting upon consumer complaints, issued the Credit Card Debt Settlement Act 2010 which banned the practice of upfront fees to for-profit debt settlement companies and those who offer their services over the phone.

No Upfront Fees

Does debt settlement hurt your credit?

You will most likely experience a significant drop in your credit score. During the negotiation process, accounts are delinquent, and lenders can continue to add interest and fees to those accounts. These missed payments can have a significant impact on credit scores. Keep in mind, however, that if you’ve been struggling to make minimum payments, your credit rating has already suffered.

Also, any negative information associated with missed payments and collections accounts will remain on your credit for seven years.

Once your creditors forgive hundreds, thousands or even tens of thousands of dollars you cannot expect to have a good credit score.

Creditors and collection agencies have a legal obligation under the Fair Credit Reporting Act to report the facts accurately. And if you settled your debt for less than the full balance, that is what they are required to list on your credit report. However, you can ask your creditor to report your settlement as “paid in full.” There is no guarantee that he will agree to this, but if he does, then your credit won’t suffer as much.

report settlement as paid in full

Is debt settlement more expensive than other options?

The cost of debt settlement is a topic of much concern to many consumers. Debt settlement is not necessarily the most expensive debt relief option because only a full assessment of a person’s debt situation can determine the cost of relieving his debt.

Debt settlement has two types of fee structures as follows;

  • A percentage of the total debt, usually between 13 and 20 percent. For example, if you owe $50,000 and the settlement company charges 20 percent, you would pay them $10,000.
  • A percentage of the amount of debt settled which could be as high as 35 percent. For example, if you settle a $50,000 debt at 50 % (25,000) you would owe the settlement company $8,750 (35% of 25,000).

A company can only charge you a portion of its full fee for each debt it settles. For example, if you owe money to five creditors the company must negotiate individually with each creditor to settle each debt. When the company successfully negotiates a settlement with one of your creditors it can charge you only a portion of its full fee for that settlement. Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you another portion of its full fee.

Will debt settlement leave me totally debt free?

If credit card debt is the only type of debt you have, debt settlement can provide a way to resolving that debt, but only if you are committed to the financial commitments that the solution requires. But keep in mind that the debt settlement process only addresses the unsecured debt, so if you have other debt such as child support, alimony, taxes or most student loans you will have to use other debt relief options to resolve them.

 Are debt settlement companies fly-by-night?

There are many fly-by-night debt relief organizations out there, but most settlement organizations are reputable, hard-working businesses committed to helping consumers. A reputable credit card debt settlement company must be in business for many years and must be affiliated with the Better Business Bureau (BBB), and must have certification from the American Fair Credit Council (AFCC).

The AFCC does not allow any firm to join if it charges a fee before settling a debt. In fact, the AFCC code of conduct for its members is more severe than FTC guidelines. According to the FTC, debt settlement providers must disclose the following:

  • how much it will cost and any refund policies
  • how much money will customers need to save up to settle?
  • any effect on credit, the potential of a lawsuit or possible tax consequences
  • key information about dedicated accounts
  • whether the provider is a for-profit or nonprofit entity
  • how long it will take for consumers to see results
  • accurate estimates of how much money a customer will save

How does the debt relief company get paid?

Credit card debt settlement companies will earn their money from a percentage of what they save you; that way, they only get paid if you save money. You must never agree to pay any fees before reaching a settlement.

 Should I Choose this option?

Only pursue this if you are already in serious default (collections) and cannot qualify for any of the other debt relief options. You will pay less than you owe if the process works for you. It should not be your first choice.

 How should I decide which debt settlement company to retain?

  • First, check online for positive reviews or testimonials from former clients, or review site such as Top Consumer Reviews.com which publishes a top ten list of Best Debt Relief Programs.
  • You should also check for a good rating with the Better Business Bureau. An excellent BBB rating is not mandatory, but it is a good sign.
  • Also, a good credit card debt settlement company will not hold your settlement funds in escrow. Instead, you will maintain possession of your funds at all times, and your funds will only be released when you have an agreement.
  • Another caution flag would be a debt settlement company that requires exorbitant fees upfront before doing any work. Instead, look for a company whose fees are contingent upon the results, and gets paid at the time of settlement.
  • A good debt settlement company will be easily accessible, always responding promptly to any phone calls and emails from their clients.
  • Finally, you should get a good feeling about the debt settlement company you’re considering hiring. If something doesn’t feel right, walk away.

Want to find the best debt relief firm options available? Get a free consultation with a debt specialist today.

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