While debt settlement may be a viable alternative to bankruptcy, the decision can be very expensive. Debt settlement companies charge fees for their services, which are often based on the total debt being negotiated. Debt settlement companies are less regulated than nonprofit credit counseling agencies that offer debt management plans. Although accreditation is available through national associations, the industry as a whole falls short of the standards adhered to by nonprofit consumer credit counseling agencies and associations. Get the right answers and know the terms before you sign.
Where is my money being held?
Debt settlement companies require you to make monthly payments to them, which they hold until you have accumulated enough savings for them to make a settlement offer to one of your creditors. Make sure that your money is being held in a federally-insured financial institution.
Who owns the deposited funds?
Your debt settlement payments are deposited into an interest bearing account. It is important for you to make sure you own all funds and interest in the account, not the debt settlement company. Furthermore, you should be able to withdraw them at any time if you decide to discontinue the debt settlement program. If you withdraw from the program the debt settlement company is required to return the funds in your account to you, minus legitimate fees it has earned, within seven days.
How long before payments are made to my creditors?
The company must tell you how many months and years it will be before it makes an offer to each of your creditors. It must also disclose exactly how much money you are required to save for each debt before it makes settlement offers to the creditors.
Do I continue making payments to my creditors?
Debt settlement companies often tell their clients to discontinue making payments on their unsecured debts. If they do, they must warn you about possible negative consequences of not paying your bills. These include damage to your credit report and credit score, possible lawsuits and judgments and additional late fees and interest charges. The Federal Trade Commission warns against doing business with companies that tell you to stop communicating with your creditors.
What is the total cost of the program?
The total cost of the program includes all payments made to creditors as well as fees charged by the company. Debt settlement companies often tell clients they will reduce their debt by 40 or 50 percent, but this figure does not represent the total cost of the program. Fees are often based on a percentage of your total debt, not the settlement amount.
What fees will I be charged?
A debt settlement company is required to explain how they charge for their services before you sign an agreement. If there are specific dollar amounts for fees, they must disclose what they are. Debt settlement companies are only allowed to charge a portion of their fees for each debt that is settled. If the company bases its fees on a percentage of your debt, it must tell you the percentage and provide an estimated dollar amount. You are also entitled to be informed of any conditions on its services, such as a refund or no-refund policy.
Are there any guarantees?
The FTC warns consumers to avoid doing business with any debt settlement company that guarantees its results. While these companies have success in negotiating with creditors, the creditors are under no obligation to accept settlement offers. Promises that your unsecured debt will disappear, be settled for pennies on the dollar or that all collection calls and lawsuits will discontinue are red flags indicating a less than reputable company.
What are the company's affiliations?
A debt settlement company that is affiliated with an industry trade association which holds its members accountable through accreditation is more likely to be a reputable company than one that is not. Ask about the company's affiliations and verify it is a member in good standing before signing an agreement.
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