Debt Negotiation Practices Exposed
by Damon Carr
I recently received a phone call from a friend of mine. He was stressed out, confused, and scared. He recently went through a divorce that resulted in him accumulating more than $60,000 in debts. As if the events leading up to the divorce wasn't overwhelming enough, he's now dealing with the mounting pressure of trying to make payments on this new debt in addition to pay the rest of his bills and expenses, eat and have a life.
The pressure was getting to him. Things were tight! He needed some wiggle room in his budget and he needed it fast. He thought he found the "magic pill" to his problem when he saw a commercial on television offering Debt Negotiation Services. The pitch was, "Cut your debt in half! Pay off all your unsecured debt in under five years with minimum payments! Don't trash your credit report by filing bankruptcy! Allow our law firm who specializes in 'Debt Settlement Negotiations' to work on your behalf. Never deal with a creditor or collection company again!"
The 60-second commercial was still running when he picked up the phone and dialed in. The representative who answered the phone told him everything he wanted to hear. He was told that his $60,000 unsecured debt balance would be settled for approximately $42,000 in five years or less. He was told that his monthly payments on this debt would be $736 per month. He was currently paying approximately $1,364 per month. The idea of saving $628 per month and paying this debt off in five years had him salivating at the mouth. He was told that his credit would remain in good standing because a law firm was representing him.
He was on board immediately. He had them fax over the paper work. He signed the agreement and faxed it back to them along with a voided check so that they can do a direct debit from his checking account for $736 per month. Nonetheless, he had some suspicion. He decided to call me to see if he'd made a good decision.
When I learned that he was working with a Debt Negotiation Company, I told him that he has to be careful for there are a lot of scam artist who pose as Debt Negotiation Companies. They make claims that they can settle debt for you. They request an initial deposit of a couple of thousand dollars. After they receive the check, you never hear from them again. The hairs on his arms stood straight as he listened intensely to me. He shared the details of the program he signed up for. I told him that there were some legitimate Debt Negotiation Companies out there, but he'll pay a stiff fee for their services and his credit will be trashed. I went on to share the details of what I was sure they did not tell him.
Credit Trashed - In order to get a settlement on your debt, you have to be severely behind on your account. As a result, they'll discourage you from making payments on your accounts. Instead, they'll ask that you send them a check every month. They will not use the money you're sending them to make payments on your debts. They'll set up a trust account on your behalf. When you have accumulated enough money in the trust account, they'll negotiated settlements on your debts one debt at a time. During this process, your credit report will report major delinquencies on the accounts you included in this plan, ultimately trashing your credit.
Fees, Fees and More Fees - You'll pay a non-refundable retainer fee up to 10% of the balance of the account you included in this program. Since you have $60,000 in debt, your fee will be $6,000. You'll pay a monthly maintenance fee of approximately $65 per month or $780 per year for the privilege of them managing your trust account. You'll pay fees to them and your bank if a check you sent to them bounced. You'll pay an overnight fee or a wire fee when money is sent to a creditor to settle on an account. Worst of all, you'll pay a settlement fee of up to 33% on the portion of the debt they negotiated to be waived. In other words, if the balance on your debt is $1,200 and they negotiate a settlement for $600, they're going to charge you a fee of $198.
Cancellation of Debt Is a Taxable Event - The IRS considers any debt you owe that was cancelled or forgiven as taxable income unless an exception such as bankruptcy applies. In the year that a settlement is reach on your debt, both you and the IRS will receive a 1099-C, disclosing the amount of the debt that was cancelled or forgiven. You're required to include the amount as income on your tax return, potentially increasing your tax liability.
Once you factor in fees, taxes and the high interest rates you're likely to receive in the future because of having spotty credit, is there a benefit? You don't need to pay an attorney exorbitant fees to stop making payments on various credit cards, trash your credit, and negotiate settlements. Not that I recommend it, but anyone can pull that off. If there were a benefit to "Debt Negotiation Companies," it would be the fact that they'll deal with debt collectors on your behalf. The fact remains that they can't guarantee you a settlement nor can they guarantee that the creditors won't take you to court.
Damon is the owner of ACE Financial. Damon has a solution for your financial problems and a plan to help you reach your financial goals Regardless of current financial status! He can be reached at firstname.lastname@example.org.
Take the Next Step:
- Stop struggling financially. Take these steps to get out of debt and begin the journey to financial freedom!
- Stop struggling to get ahead financially. Subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!
Share your thoughts about this article with the editor.
More Debt Tips & Tools
- 6 smart strategies for paying off your credit cards
- 5 great second jobs to bring in extra cash
- Pay down debt now or save: Here's how to choose
- Can I get a debt consolidation loan with bad credit?
- Staying motivated to continue digging yourself out of debt
- Options when you can't make your car payments
- 8 ways to beat retail therapy
- This week's Readers' Tips
- Reduce your debt step by step
- Am I a good candidate for credit counseling?
- Do I have a debt problem?
- Compare personal loan rates
- Get free answers to financial questions
- Get free answers to legal questions
- Calculate the real cost of your debt
- Debt pay-down calculator
- Calculate the true cost of paying just the minimum