Many consumers have large amounts of debt on their credit cards and, because of changes in personal finances, are now unable to pay them off. Some for-profit and non-profit organizations have been set up to help consumers consolidate all of their credit card debt into one monthly payment over a certain length of time. If you are on the verge of bankruptcy, consider this step because it will not affect your credit score as much as other options.
How It Works
According to the Frequently Asked Questions on the Debt Workout web page (See Reference 1), in credit card debt elimination settlements, a for-profit or non-profit organization checks your credit score, with your permission, and determines the amount of outstanding debt you have on your credit cards. It takes that amount and adds a certain percentage of interest over three years to determine what your monthly payment will be. In return, you must stop using all of your credit cards, because the accounts will be closed. The company pays off your credit card balances, and your one monthly payment goes directly to the company that negotiated your settlement. Companies typically charge a monthly maintenance fee for the service.
Choosing a Company
According to the Better Business Bureau, choosing the company that is looking out for you, the individual, is the most important part of the process. Typically your best option is to use a non-profit organization. The best way to make sure a company is reputable is by checking with the Better Business Bureau in your area. The BBB also provides tips on which type of settlement is best suited for you. Also, government websites list organizations that can help.
Process
According to the Credit Info Center, once you choose an organization, you fill out an application online or over the phone. The company will tell you how much you owe, how much your monthly payments will be and for how long (usually three years), what the interest rate is, and how much you will repay. If you agree to the terms, you will have to print and sign several authorization documents. (Some companies let you do this online.) Also, the company will tell you to stop paying all of your credit cards right away. The debt relief company will then begin the process of negotiating with your credit card companies. Consumers fear this step the most, because the credit card companies begin to call you in a desperate attempt to keep you as a customer. The debt relief specialists say you should ignore those phone calls. Once the negotiations are complete, the debt solution organization will set up your payment plan to automatically debit out of your bank account. They will also let you know when the first payment is due. You must continue to make the payments throughout the term. Your credit score will take a major hit, and you will have to rebuild it over time.
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