Above is one attorney explaining the pitfalls of credit card debt settlement.
The first reason debt settlement does not work is if you cannot afford to pay your credit debt then how can you afford to pay into a debt settlement fund? But, read on and watch the video for an objective evaluation of debt settlement.
Debt negotiation and debt settlement are essentially the same thing. You sign an agreement with an organization providing debt settlement/negotiation services. You do not make your monthly credit card payments. Those monthly payments go to the settlement firm. Your money is NOT disbursed to your credit card accounts. Instead, your money accumulates to enable a negotiation or settlement for 50-70 percent of the debt (more or less depending on the claims of individual settlement firms) once there are “sufficient” funds to begin negotiating less-than-full-value, lump-sum, paid-in-full payments. The debt settlement firm’s fees come out of your accumulated funds before any creditors are paid.
The simple fact is the math just does not work when you have to pay for debt settlement. So you stop making monthly payments to save funds to enable you to negotiate a reduced balance by offering a lump sum payment.
As a debt settlement strategy that makes sense. However, if you are paying for debt settlement, that makes no sense because the debt settlement firm’s fee, which is typically in the thousands of dollars, comes out of your settlement fund.
To look at it another way, the best time to negotiate a reduced balance lump sum payment is about six months after you stop making payments. That is when the credit card bank is about to charge off your account and sell it for pennies on the dollar. If your account balance is $12,000, and you have saved $6000, you might be able to get the bank to take the $6K as payment in full.
Credit Card Late Fee Settlement
But, if you are with a debt settlement firm, $1500 – $2500 needs to first come out of your settlement fund for settlement “fees.” Is the bank then going to settle for $3000?
And most importantly, do you have $3000-6000 in cash to settle with. Probably not. You should always keep a cash reserve and not give money to credit card companies out of fear of debt collection proceedings.
These firms dominate radio advertising and bombard email with tempting phrases like: “This is an urgent message for people with extremely large credit card debt. You must act quickly. This life changing information is available for free today; or, there is something like this; “Call and learn a secret the credit card companies do not want you to know – How to settle your debt for less than you owe.”
If you call, the first question you are asked is how large is your credit-card debt. If you debt is large, then they can charge a large fee. When you call, you talk to sales people who emphasize their experience and connections with the credit card companies and who may promise whatever percentage of settlement they have to get your upfront fee.
If you are convinced to use one of these firms for credit card debt relief, your success will depend on how quickly your money accumulates, which depends on how quickly you can pay it in. It will also depend on your level of debt.
As I have pointed out, a lot can wrong with this strategy. There are a lot of internet scams. Beyond thse, even the “reputable” firms can deplete your accumulated funds with excessive fees for negotiating your accounts. In addition to their fees, they can negotiate a 40 percent settlement figure and tell you it is 60 percent, pocketing the 20 percent difference. Some credit card companies will not settle, and their late fees and high interest accrue in your name. Other credit card banks may settle but not agree to list your account favorably with the credit reporting agencies. Or, the debt settlement firm may not even bother with attempting to negotiate favorable reporting to your credit files. The worst that can happen is your debt settlement firm simply goes out of business, and your accumulated funds disappear.
To succeed with fee-paid debt settlement, don’t fall for a debt settlement firm’s sale pitch, use an attorney specialized in this area.
Evaluate debt settlement law firms for;
- their fees;
- how they will escrow funds and account for them;
- how they will look out for your credit rating;
- how they document their activity with your credit card banks;
- and how your funds will be protected and returned to you if they stop functioning.
Few if any of these firms will pass this evaluation.
Instead if you have the money, use an attorney and insist your attorney get everything in writing from the credit card companies.
Here is an excellent article on creditcards.com about the pitfalls of debt settlement for credit cards, 8 myths about settling credit card debt.
If you use an attorney, determine with him early in the process which of your credit card companies will be difficult to settle with and remove them from your settlement program to avoid risking penalties and bad credit reports for nothing. Be sure to have your attorney negotiate good credit reporting from your credit card banks. With some luck, you could end up with credit card debt relief at a discounted amount with good/decent credit.
Starting on October 27, 2010, The Federal Trade Commission (FTC) ruled that for-profit companies that sell debt relief services over the telephone may no longer charge a fee before they settle or reduce a customer’s credit card or other unsecured debt. But, there are reports of many these firms finding “legal” ways to work around this regulation.
Credit card debt relief could mean avoiding these so-called professionals who offer a helping hand but really just want to take your money. Read this post for an alternative to debt settlement, Those with Unaffordable Credit Card Debt Are Better Off Responding to and Resisting Debt Collectors.