Wednesday, October 5, 2011

What Happens When Debt Settlement Companies Can't Settle?

If you've fallen behind on your bills and your creditors are threatening to send you to collections or worse -- sue you -- debt settlement is an option. Debt settlement companies employ professional negotiators who communicate with your creditors on your behalf. The goal is to convince your creditors to accept less for the debt than you actually owe. Unfortunately, debt settlement negotiators are not always successful in obtaining settlements for their clients.

How It Works

    All debt settlement companies' methods differ. In general, however, a debt settlement company requires you to sign a contract agreeing to pay various fees for the company's services. The company then requests that, rather than submitting payments to your creditors, you submit the payments to the settlement company. The company holds on to the payments, letting you fall further and further behind on your bills.

    Debt settlement professionals know that creditors are more willing to negotiate a settlement when the debtor stops making payments. Creditors would often rather accept a settlement than sell your debt to a collection agency for pennies on the dollar or endure the expense of filing a lawsuit.

Consumer Liability

    Even if settling your debt is in your creditor's best financial interests, that does not mean that it will work with the company and negotiate a reduced balance on your account. Creditors are not legally required to entertain offers from settlement companies. Should the company fail in its attempts to procure a settlement, you still legally owe the debt to your creditor -- in addition to any late fees and interest charges your debt incurs during the negotiation process. You still owe the debt settlement company's fees as well -- even if your creditors do not agree to a settlement.

Credit Damage

    Although settling debts is detrimental to your credit rating, leaving your debts unpaid and having them sent to collections is much worse. Your payment history is the most significant single factor that makes up your credit score. Each payment that the debt settlement company withholds or you miss during the negotiation process counts against you on your credit report. The Fair Credit Reporting Act allows the credit bureaus to maintain a record of your missed payments and collection accounts for up to seven years.

Debt Settlement Alternatives

    A reputable credit counseling program serves as a viable alternative to debt settlement. Nonprofit credit counseling organizations often charge much lower fees and not only help negotiate lower balances, but teach you how to manage your debts more responsibly in the future. The Federal Trade Commission warns, however, that not all credit counseling organizations charge reasonable fees and recommends that consumers ask to see the fee structure in writing before enrolling in the program.

    Chapter 13 bankruptcy is also an alternative that works for certain consumers. During Chapter 13 bankruptcy, you set up a three- to five-year repayment schedule over which you can pay off your debts. If your income does not allow you to repay your full debt, the court discharges the balance after the repayment period and you no longer legally owe it. Unlike debt settlement, creditors have no choice but to accept a bankruptcy court's discharge. Although a Chapter 13 bankruptcy discharge does not adversely impact your credit report, filing for bankruptcy does. The negative impact bankruptcy has on your credit score will differ depending on the information currently present within your credit report.

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