Beware of any debt negotiation companies that
promise to reduce your debts by "50%" by negotiating
lower interest rates and lower monthly payments from creditors.
This is because most of these debt negotiation companies will
charge you enormously high fees and will ruin your credit just
to get their job done. What's more, any settlement that you
receive on your debts (any debt forgiveness) will also become
taxable income for you!
Paul Richard, Director of the Institute of
Consumer Financial Education based in San Diego quotes, "Be
very, very careful because there can be substantially more harm
than good. It's the fees, the possible liability to the IRS
after you get this negotiated and they're not doing anything
for you that you can't do yourself. These slick debt negotiators,
they smooth talk people around all these issues. They're really
taking advantage of people."
Let's explore a few of the pitfalls of dealing
with debt negotiation companies shall we?
Enormous Fees Charged
Debt Negotiation companies will charge you
enormous amounts of fees by using the following tactics:
-> Large upfront "down payment" type fee
-> Fee based on amount of debt you owe or # of creditors
you owe to
-> Fee based on the amount of debt that a creditor is willing
to wipe away
Daniel Benson, a senior Consumer Attorney at the Legal
Aid Society of San Diego quotes, "There are all these
hidden charges going on." For example, a debt negotiation
company will say they will settle $6000 out of your $7500
credit card debt by negotiating with the lender. They
will ask for a 25% - 35% fair share cut! This means you
will have to pay them (25% x $6000 = $1500). You really
aren't saving much are you? Plus, you will have to pay
them additional administration fees as well as the initial
upfront fee. You will actually be losing money in this
One of Benson's clients portrays a good example of the
above. Benson's client was 82 years old and owed about
$2200 of debt. The debt negotiation company charged her
an initial $250 application fee, and after the debt was
settled, charged her a $1350 in settlement fees. That's
$1600 paid just in fees to settle a small debt of $2200!
Crush Your Credit Score
The first step a debt negotiation company
will ask you to do is to stop making payments to your
original creditors (lenders to whom you owe money). Instead,
the debt negotiator will ask you to send him the payments!
All these contributions you make to the debt negotiation
company are stored in a separate account, until the negotiator
is ready to make a settlement with the original creditor.
This takes a long period of time, maybe even 4 - 6 months!
And you know what happens if you do not make 6 months
worth of payments to your credit card lender right? They
will report you to the credit bureau and ruin your credit
Dianne Wilkman, President of SpringBoard
(a Nonprofit Consumer Credit Management Organization in
Riverside, California) quotes, "They tell you to
stop talking to creditors, which is a bad idea. Your creditor
will charge off your account and that will ruin your credit."
Creditors typically charge off a credit card account if
there have no payments made on it for the past 6 months.
A charge-off remains on your credit report for 7 years
+ 180 days from the first day of non-payment (Fair Credit
Reporting Act). 3DebtConsolidation.com says "A charge-off
is the biggest negative red flag on your credit report.
It means a lender lost money doing business with you"
Even if a debt negotiation deal works
out, your credit will be ruined. That's the good side
of things. The bad side is that if the creditor refuses
to accept the debt settlement deal, they have the right
to sue you + your credit will be ruined!
Example of a Bad Debt Negotiation Company?
An example of a bad debt negotiation company
recently in the news headlines is New Leaf Associates LLC, operating
in New Port Richey, Florida. The company claimed it had a legal
administrative procedure that helps its clients get rid of their
credit card and student loan debt. After thousands of complaints
received from the local Floridan community, the Attorney General
of Florida filed a lawsuit against New Leaf Associates LLC on
July 7th, 2006. It was determined that New Leaf LLC collected
hefty amount of fees from 2200 clients and never terminated
1 single debt.
Instead of going through the risky procedure
of debt negotiation, try some of the following alternatives.
It Yourself Debt Reduction