You Might Save Money And Pay Off Debt Faster
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Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments. She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals.
If you are in debt and cannot pay your bills, is a debt settlement program the cheapest way out of debt? You might draw that conclusion from the American Fair Credit Council , an industry association of companies operating in the debt settlement industry that have agreed to a strict code of conduct.
Key takeaways from the 2020 report include that debt settlement provided, on average, $2.64 in consumer savings for each $1.00 fee assessed, and that nearly all offered settlements, over 98 %%, resulted in a decrease of the clients debt that was greater than the accompanying fees.
“Debt settlement can save consumers money by allowing them to resolve their debts for less than the full balance, says Gerri Detweiler, co-author of the eBook, Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights. He adds: It can be a way out of debt for some individuals who cant afford to pay back the full amount they owe.
Still, is debt settlement the cheapest way to emerge from debt? Let’s take a closer look.
Strategies When Accounts Are 6 Months + Overdue
Once your account has been unpaid for six months or more, your creditor has several options and will do one of the following:
- Continue collection efforts using its in-house collection department
- Hire a collection agency to collect your account on a commission basis
- Sue you
- Sell your outstanding account
Getting The Law Firm Suing You To Agree To A Lower Negotiated Balance Pay Off And Settle The Debt Will Depend On A Host Of Things
Are you being sued by the original creditor or a debt buyer? Look on the court papers you received for who the attorney identified they are working for.
Are you experiencing personal financial hardships that are verifiable unemployment, underemployment, medical or health concerns, are you on a limited income from federal benefits, are you currently being garnished from other unpaid debts. depending on the answers to these questions, the amount you pay to settle the account, or the amount of the monthly payment you may consider agreeing to can be impacted.
When it comes to being sued by a debt buyer, you may want to consider defending against the lawsuit as an alternative to settlement or payment arrangements.
Debt buyers typically get a scant amount of detail about your debt from the creditor they buy it from. If your account was purchased and then resold again, the degree of separation from your original lender is even more of a problem.
Debt buyers may be limited in the way they can back up their claim about your debt in court. They often have an excel spread sheet that lists all the accounts they purchased in the portfolio that had your account in it. They may only have access to your name, account number, social security number, the balance owed at the time of sale, your address and phone number, where you work. In other words, just the basic details.
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Researching Debt Settlement Companies
Before you enroll in a debt settlement program, do your homework. Youre making a big decision that involves spending a lot of your money money that could go toward paying down your debt. Check out the company with your state Attorney General and local consumer protection agency. They can tell you if any consumer complaints are on file about the firm youre considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.
Enter the name of the company name with the word “complaints” into a search engine. Read what others have said about the companies youre considering, including news about any lawsuits with state or federal regulators for engaging in deceptive or unfair practices.
Enroll In A Debt Management Plan
A certified credit counselor should review your financial situation and offer customized money-management advice before enrolling you in a DMP. For example, Nitzsche says Clearpoint identifies and addresses reasons for financial difficulties first. Counselors may help clients create a household budget, outline financial goals, and address financial concerns in addition to developing a DMP to deal with debt.
Consider examining the DMP to make sure you understand and agree to its details. You may want to confirm that credit card payments are scheduled according to your due dates in order to avoid late fees. Nitzsche says you can contact creditors to adjust due dates if needed.
The FTC offers guidance on checking the credentials of and verifying that a DMP may work for you. In addition, consider asking for a schedule of fees so you’ll know what services you may receive and how much they cost.
Consider getting documentation of any deals in writing. In this way, you’ll be able to confirm your understanding of agreements.
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Your Account Could Be Assigned To A Collection Agency
If your account remains unpaid for more than six months, then at some future date your creditor might assign your outstanding account to a collection agency for collection.
Large creditors have tens of thousands, and in some cases, hundreds of thousands of outstanding accounts. The most cost-effective way for a creditor to make money on its portfolio of bad credit card debt is to simply farm it out to one or more collection agencies on a commission basis. Here are the three primary activities of collection agencies:
- Attempting to locate current contact information for debtors
- Phoning debtors and making demands for payment
- Sending collection notices to debtors by mail and making demands for payment
What To Do If Your Credit Card Negotiations Fail
Do not despair if your creditors refuse to accept your debt negotiation terms. They are expert negotiators, and it may be time to get expert negotiators on your side.
You may be able to accomplish your goals by enrolling in a debt management program . Also known as a debt management plan, it allows your representatives to conduct credit card negotiations with creditors on your behalf to decrease interest rates and also decrease the amount you pay each month.
Your credit counsellor may also be able to negotiate with creditors to remove penalties and reduce or eliminate the interest applied to your debts. So, if you feel like you are in over your head and your negotiation efforts have failed, know that a debt management program may provide some of the benefits you were hoping to achieve.
A trained credit counsellor is an expert at working with creditors and negotiating with them on behalf of consumers. If credit card negotiation on your own has failed and you need help, give us a call at to speak with one of our trained credit counsellors to get started with a Free Debt Analysis.
Discuss options to get out of credit card debt with a trained credit counsellor.
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Other Debt Relief Options
Working with a debt settlement company is just one option for dealing with your debt. You also could: negotiate directly with your credit card company, work with a credit counselor, or consider bankruptcy.
Talk with your credit card company, even if you have been turned down before. Rather than pay a company to talk to your creditor on your behalf, remember that you can do it yourself for free. You can find the telephone number on your card or your statement. Be persistent and polite. Keep good records of your debts, so that when you do reach the credit card company, you can explain your situation. Your goal is to work out a modified payment plan that reduces your payments to a level you can manage.
If you don’t pay on your debt for 180 days, your creditor will write your debt off as a loss your credit score will take a big hit, and you still will owe the debt. Creditors often are willing to negotiate with you even after they write your debt off as a loss.
Contact a credit counselor. Reputable can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.
Should You Do It Yourself
If you decide that a debt settlement is the right move, the next step is to choose between doing it yourself or hiring a professional debt negotiator. Keep in mind that your credit card company is obligated to deal with you and that a debt professional may not be able to negotiate a better deal than you can. Furthermore, the debt settlement industry has its fair share of con artists, ripoffs, and scams, which is why many people choose to try it on their own first.
Debt settlement can adversely impact your credit score, making it more difficult to borrow money at affordable interest rates in the future.
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Get Everything In Writing
Once youve found someone at the credit card company who is willing to negotiate, make sure you get the terms of the deal in writing.
The credit card manager you made a verbal agreement with may leave the company or your account may accidentally be sent to collections. Anything can happen, so protect yourself by putting it all on paper.
Negotiate A Lower Interest Rate
- Place a call to the customer service number for the credit card you want a lower rate on.
- Tell them you’d like to get a lower interest rate on this card and your annual fee eliminated if you have one.
- If they ask why, tell them it will better help you meet your financial obligations to them without any interruptions in your payments.
- If they hesitate to offer you a deal, tell them you’re considering other cards with no annual fee and lower interest rates. Tell them you’ll have to transfer your balance to one of those cards if they can’t negotiate a better deal with you.
- If they still refuse, ask if you can talk to a supervisor. Sometimes the first person that answers the phone may not have the power to get you a lower interest rate. Someone higher up usually has the authority to negotiate better terms with no problem.
- If they refuse to help, then don’t hesitate to transfer your balance to a card at a different company with a lower interest rate and no annual fee.
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A Good Debt Settlement Company Will:
- Disclose all program fees and costs before you sign up for a debt resolution program
- Have easy-to-understand written policies about its debt resolution program
- Give you an estimate of how many months or years it will wait before making an offer to each creditor
- Estimate its intended results, but never guarantee a specific settlement amount
- Tell you how much money you must save up before it will begin making offers to your creditors
- Send all resolution offers to you for your approval
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Look Into Debt Settlement
For-profit debt settlement companies work to negotiate lump-sum settlements with creditors.
Debt settlement companies ask you to stop making payments to your card issuer and instead require you to make monthly payments to your debt settlement company to build your account, Sterling said. Once your account grows large enough, the debt settlement company will contact your card issuer and make an offer to settle for less than you owe. If the issuer accepts the offer, the debt settlement company pays your creditor and keeps a percentage of the money youve paid them.
This is often a last resort, and if you go through with this option it will lower your credit score.
The Pros Of Professional Debt Settlement
Although debt settlement does have many great benefits, its not the only solution available to those in need of debt relief. A professional will assess your specific situation and do their best to pick the best option, be it debt settlement, or any other of the many options including:
- Debt consolidation
- Consumer proposal
- Personal bankruptcy
When youre negotiating a debt settlement, creditors will generally attempt to get as much money out of you as possible. Without the help of an expert debt negotiator, you may not get the most beneficial terms to settle your debts. In other words, you may end up paying more than you would have needed to settle your debt. You could negotiate with creditors on your own, but, it is safe to say that with an experienced professional you will get a better settlement offer and you will end up paying back less.
Check out what questions you should ask your debt collection agency.
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Debt Settlement Vs Minimum Monthly Payments
Making minimum monthly payments on high-interest debt is not a good option for consumers who want to save money. It can take yearsdecades, evendepending on how much debt you have and what the interest rate is. Interest compounds every day on your entire balance, and with minimum payments, you make little progress paying your balance down each month.
Consistently making minimum monthly payments and forking over tons of interest might make you highly profitable to your creditors, and, yes, solid payment history is good for your credit score. However, we dont recommend spending more than you have to on interest to boost your credit score. A good credit score wont pay for your retirement money in the bank will.
Further, if the amount of available credit youve used is high relative to your credit line, that will hurt your credit score and potentially negate the effect of your consistent, timely payments. The AFCC report cites that “the average client reduced their total debt at the time of settlement of approximately $30,000 to $35,000 by roughly $9,500 after deducting fees.
Consumer who consistently make just the minimum monthly payment on high interest credit card debt can end in paying more in interest than the principal.
What Are My Options
When it comes to debt relief, you have options. You can still resolve a debt after a lawsuit has been filed. You can even resolve a debt after a creditor is successful in a lawsuit and obtains a judgment against you. As long as you face your debt problems head-on, you almost always have options that will allow you to seek significant debt relief or to restructure your debt so that paying it off becomes a more manageable process. Many creditors will let you resolve your debt at any time, whether by debt settlement, payment in full, or by another option for debt resolution, and even after they have filed a lawsuit.
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Don’t Take No For An Answer
When you make the call, don’t take no for an answer. If you’re easily discouraged by their no, then it saves them money. Be pleasant, but firm. Don’t talk from a position of weakness.
For example: If you say I was wondering if maybe you could give me a lower interest rate?, that sounds wimpy and probably won’t work. Speak from a position of strength: I want you to give me a lower interest rate on my credit card and eliminate the annual fee. If you can’t help me out, I’ll be floating my balance to another credit card that has offered me a lower interest rate. You might even mention specifically some of the offers you received in the mail from other companies.
If you sound passive and unconfident, they will roll right over you.
Can You Still Negotiate Credit Card Debts If Youre Being Sued
I have unpaid credit card debt.
Can you negotiate a credit card debt if you are being sued?
Yes, you can negotiate and settle a credit card lawsuit. In some cases, if you cannot raise enough money to settle in a lump sum, you will be able to set up affordable payment arrangements to keep from being garnished, or your bank account levied.
Being sued for a happens at different stages of collection. Are you being sued by a collection law firm on behalf of your original creditor?
Lawsuits in the first stage of credit card collections is not that common, but it does occur. Most of the time , you have at least 6 months of nonpayment before the risk of being sued begins. The risk of being sued increases incrementally from there. Your original credit card bank may target your account for placement with a collection attorney based on several factors. The following is not an exhaustive list, and not all that helpful to you , but others reading this later may get some benefit from it:
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