Posts tagged "debt negotiation"

Debt Settlement and Debt Negotiation - What is the difference?

Many people are confused by the range of programs which proclaim that you can get out of debt. There is debt settlement, debt negotiation, and consumer credit counseling.

In most people's minds, all these types of companies are the same. In my opinion, they are not. I am going to show you the difference between debt negotiation companies and how their operations are different from debt settlement companies. By the way, in case you're thinking I am advocating debt settlement firms, this is not the case. I am only explaining the difference.
What's Wrong With Debt Negotiation. I am sure you can tell by my other blogs that I am not much of a believer in debt negotiation/settlement companies. Most are scams.

Many of the nasty practices by these companies are now illegal, per the new FTC regulations. 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.

Unsecured Trust Accounts. Debt negotiation companies set up a "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. 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. Also, unlike consumer credit counseling services, a debt negotiation company doesn't "qualify" you for the amount of the payment you make, so you can wind up paying very little towards principal of the debt. 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. 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.

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. In addition, you will continue to receive negative marks on your credit reports. 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 Uusally Paid Upfront. Usually your first 2-4 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. See my previous blog on this issue, re: the new law on debt negotiation.

Most debt negotiation companies claim to be able to negotiate your debt with the credit card companies 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 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 - the majority of the debt negotiation companies failed to adequately explain 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.

Please be wary of these companies, especially if what they promise sounds too good to be true-then it usually is.  Most the time, bankruptcy is a much better way to proceed.

The New Bankruptcy Law -- How Is It Affecting Debt Negotiation?

Back in April 2005, Congress made sweeping changes in U.S. bankruptcy law that went into effect on October 17, 2005. It's called the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," and it's meant big trouble for Americans struggling with debt problems.

What effect did the new bankruptcy law have on the practice of Debt Settlement (also called Debt Negotiation)? Are creditors still willing to negotiate with consumers seeking to avoid bankruptcy?

Will lump-sum settlements still be possible now that this tough new law has been passed?

The short answer is "YES." It will be "business as usual" in the collection industry. People that choose to file bankruptcy will definitely be affected for the worse, as I'll outline below, but those who choose to privately negotiate their way out of debt will notice very little difference. Creditors will still negotiate. Deals will still be made. And nothing much will change in the world of collections. In fact, a viable alternative to bankruptcy will be needed more than ever.

The credit card banks lobbied with millions of dollars to get this law passed. They worked at it for about a decade. Now they are celebrating. These are the folks who think the bankruptcy system has been abused by wealthy individuals, who have defrauded creditors when they could have repaid their debts.

The facts tell a different story:

1. During the period from 1995 to 2004, bankruptcy filings doubled, while in that same period, credit card industry profits TRIPLED.

2. Credit card companies have not been held accountable for their targeting of "easy credit" to individuals who could not afford such loans, which in turn has contributed to the wave of bankruptcies over the past decade.

3. For people 60 or older, 85% of bankruptcies are caused by medical bills or job loss.

4. A divorced woman is 300% more likely to file bankruptcy than a married woman.

5. African-American and Hispanic homeowners are 500% more likely to file bankruptcy than white, non-Hispanic homeowners.

6. Approximately half of all bankruptcies are filed because of medical expenses due to lack of health insurance, or lack of adequate coverage leading to uncovered expenses.

7. The median income of bankruptcy filers is $25,000. (So much for the "rich" abusing the system.)

The new law was a GIFT to the credit card banks, pure and simple. Some estimates show that it will add another $5 billion to the industry's bottom line. In other words, the bill is about profits and not much else.