Reliable Debt Settlement

Although debt settlement may appeal to you because it promises a way to get out of your debt for less, the impact on your credit will be devastating no matter how you go about it. Even when you take precautions to avoid scams, you will damage your credit before you even qualify for settlement. If you have decided to follow through with debt settlement, it's important to know how to find reliable resources.

Debt Settlement

When you qualify for debt settlement, you make a one-time payment for a percentage of your existing balance, and in exchange, the rest of the balance is forgiven. Usually, the single payment is between 20 and 75 percent of what you owe, according to MSN Money. Creditors only agree to debt settlement if they believe you are on track for bankruptcy, which usually means defaulting on your payments as proof that you cannot make payments. In lieu of receiving nothing, creditors agree to take a partial payment as a settlement for your debt.

Scams

Many so-called debt settlement companies have scammed people out of thousands of dollars, so it's important to find a reputable credit counseling organization rather than submitting to a debt settlement company that is persistent in contacting you. Debt settlement companies have a bad reputation because many have asked clients to make deposits into accounts where they "hold" the money while supposedly negotiating with the clients' creditors--then never making those negotiations or payments. Even with settlement companies that do follow through with negotiations, the fees are usually so high that the client would have been better off paying the full balance.

Credit Counseling

A reputable credit counseling organization isn't focused on getting you to choose debt settlement as an option. Their main goal is to help you strengthen your credit by identifying your financial struggles and working with you to create a budget. After carefully reviewing your financial situation, a credit counselor will help you choose among your debt relief options, which may include debt consolidation, settlement, a debt management plan or even bankruptcy. The National Foundation for Credit Counseling recommends trustworthy credit counseling organizations on their website.

Self-Help

You may also be able to negotiate debt settlement on your own; however, it's important to understand what creditors are looking for in debt settlement candidates. In general, you must have defaulted on payments for at least three to six months, according to MSN Money. At that point, Zip-Debt co-founder Chuck Phelan suggests calling your creditor and letting them know that you have a certain amount of money to offer as settlement for your debt, or else the company will receive nothing. If they agree, get the settlement in writing and make sure your credit report is marked as "settled" and not "account closed by creditor," which is more damaging for future borrowing.

Warnings

Debt settlement is extremely damaging to your credit, even if you handle it through a reliable credit counselor or on your own. MSN Money writer Liz Pulliam Weston points out that a payment missed by over a month has the ability to sink your score by 110 points--with debt settlement, you're looking at several months of missed payments. Also, keep in mind that you need to have a fairly large chunk of money to put down for debt settlement. You will also have trouble borrowing money in the future, since lenders are wary of lending to those who have only made partial payments on their debt in the past.

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Can Debt Relief Agencies Deal With Collection Agencies?

When a person falls into debt, he may approach a number of parties about solving his problem. Among his sources of help are debt relief agencies. Debt relief agencies are companies associated with law firms that help people negotiate with creditors. These agencies may provide their clients a number of different services related to debt management. However, nearly all provide some sort of assistance in helping the individual conduct negotiation with collection agencies.

Debt Relief Agencies

Debt relief agencies, also known as debt settlement companies, are government-regulated firms that help people manage their debt by reducing the overall size of their debt burden. In some cases, a debt relief agency may suggest that the person consolidate his debts, refinance certain loans or modify the repayment terms of debts with his lenders. However, most often, debt relief agencies will specialize in conducting negotiations with creditors, including collection agencies.

Collection Agencies

Collection agencies are little different from normal creditors. Often, collection agencies will work on commission for creditors, or they will simply buy the debt and become its owners. A debt relief agency will negotiate with whoever currently owns a person's debt or is tasked with administering it. A collection agency, whether working as a representative of a creditor or on its own, has the same rights as the first creditor to collect on the debt.

Debt Counseling Companies

Debt relief companies may be confused with debt counseling or credit counseling firms. In fact, these businesses are very different. Credit counseling firms are not associated with any legal counsel, and are not subject to the same strict regulation as debt relief firms. This can lead to less reliable service and results. In fact, some credit counseling companies are financed in part by creditors, meaning they may not have their clients' best interests at heart.

Considerations

A person does not necessarily need a debt relief agency to conduct negotiations with the collection agencies. While the debt relief agency may be more skilled at conducting the negotiations, it also commonly takes a cut of the proceeds. A person may be able to save money by attempting to negotiate with the collection agency directly. However, some collection agencies may not be open to any kind of settlement.

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Does Consolidating Credit Card Debt Ruin Your Credit Score?

When you have thousands of dollars of credit card debt spread across multiple cards, consolidating it into one monthly payment can help you organize your finances. There are a few ways to consolidate, including transferring balances to one card, taking out a large installment loan or using a debt consolidation company. Each has a different effect on your credit score, and if you are careful, you can consolidate debt without ruining your credit.

Balance Transfers

Transferring balances between cards can hurt your credit score, depending on how you do it. If you open a new card, this will slightly lower your credit score because of the credit inquiry and new account. In addition, if the balance you move puts the card close to its credit limit, this will hurt your score. The best way to transfer balances without hurting your credit score is to use a card with a high credit limit and keep the other cards open after you transfer balances off. This keeps your overall ratio of balances to limits as low as possible. However, it can also tempt you to continue using the other cards and accumulate more debt, which will hurt your score.

Installment Loans

Another way to consolidate credit card debt is to get a large installment loan, which you pay off over a set time period with equal monthly payments, and use the money from the loan to pay off all your credit cards. As with opening a new credit card, applying for and opening a new installment loan slightly lowers your credit score. However, one advantage is that the ratio of your credit card balances to their limits will significantly drop when you pay them off, increasing your score, as long as you do not charge up balances on them again. A potential disadvantage of an installment loan is that the large monthly payment might be too much to handle. If you couldn't pay all your credit cards separately, you are unlikely to be able to afford a large payment that combines them all. Missed payments will hurt your credit score, especially if they are chronic.

Debt Consolidation Service

Many companies offer debt consolidation services. They might collect one monthly payment from you and distribute it to all of your credit card companies and other lenders, or they might arrange an in-house installment loan. The disadvantage of these companies is that you usually have to pay high interest rates and fees that increase the cost of repaying the debt above what you would pay if you managed it yourself. Therefore, your credit score will not increase as fast as it should. In addition, if you allow another company to deal with your creditors, it might miss payments on your behalf and ruin your credit score.

Bottom Line

The elements of debt consolidation that can hurt your credit score include opening new credit cards or loans, having high balances on your credit cards in relationship to their limits and missing payments on any of your debts. However, there are ways to consolidate your debt that will damage your score minimally to begin but eventually help your score. Focus on opening no more than one new account, establishing an affordable monthly payment, sticking to the payment schedule and not using your credit cards to build up more debt after you consolidate.

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Who Owns the Debt From a Charge-Off?

When you have a charged off-account, your creditor can either retain ownership of that debt or sell it to another company or individual. When the sale of a debt occurs, you should receive notification from the debt buyer. Some companies find it more cost-effective to sell charged-off accounts to collections agencies rather than to spend resources attempting to collect on the debt.

Charge Off

Finance companies list loans as assets because loans bring in regular interest payments that generate profits for the company. However, when borrowers default on loans, creditors can no longer regard those loans as assets because the loans no longer generate any income. When a charge-off occurs, a creditor updates its financial records so that delinquent loans are no longer shown as assets. The company acknowledges that it does not expect to receive payment from the borrower and therefore it writes off or charges off the debt.

Debt Collection

Most finance companies have an in-house debt collection department that attempts to collect payment on delinquent and charged-off accounts. Debts chased by the in-house collections department still belong to the company that originally owned the debt. If the internal collections department proves unable to collect a debt, the company that owns the debt can either retain ownership of the debt indefinitely, in which case more company resources are used to chase the borrower, or the company can sell it.

Collection Agencies

Collection agencies usually negotiate to buy bad debts from creditors at low prices and in some instances, these firms buy debts for a fraction of the amount owed on the loan. Although the creditor agrees to sell the debt for a fraction of the balance owed, the borrower still has to pay the entire balance owed to the collection agency. However, the collection agency may agree to a compromise deal with the borrower. If a bank sold a delinquent $10,000 debt to collection firm for $1,000, that collection firm would make a 100 percent profit if it agreed to a settlement that involved the borrower making a payment of just $2,000.

Credit Reports

Some borrowers become confused about the ownership of charged-off accounts because they see an account listed twice on their credit report. Your credit history shows records of your past debts as well as your current debt obligations. Therefore, a record exists of the account you originally established with your creditor and a separate record exists that shows the account as a debt owed to the collection agency that now owns it. You must payoff the debt's current owner rather than the original owner if you want to settle the debt.

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Collection Agency Legal Rights

Collection agencies have a number of legal rights to use during the collection of debts. The rules and regulations can vary from state to state, but they must comply with the Fair Debt Collection Practices Act which governs their collection activities.

Calling Hours

Collection agencies can call you between the hours of 8:00 a.m. and 9:00 p.m. in your local time zone. Debt collectors calling from different time zones need to be aware of these calling times.

Third Party Contact

Debt collectors can call a third party not associated with a debt but only for the purpose of receiving contact information about the debtor. They can only call once unless they believe the third party has new contact information about the debtor.

Employment Guidelines

Collection agencies can call you at your place of employment, to collect a past due debt, unless you tell them not to. If your place of employment does not allow phone calls, the collection agency should comply.

Written Correspondence

Collection agencies may contact you with written correspondence to notify of the outstanding balance owed and the creditor that they represent.

Postdated Checks

Collection agencies can accept checks postdated five days or more if they notify the consumer in writing of their intention to deposit the check. Notification should be sent between three and ten business days before the deposit is made.

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Will It Hurt or Help My Credit if I Just Bought a New Car?

Building good credit takes time, but the rewards are worth the effort. Qualifying for the best interest rates and terms are side effects of good credit. To build credit, you must demonstrate to creditors that you are a responsible borrower. Buying a new car can help boost your credit score as long as you manage your loan correctly.

Credit Inquiries

When shopping for a new loan, your credit score is pulled repeatedly. Generally, your credit score decreases with a new inquiry, but when shopping for a mortgage, car or student loan, inquiries have little impact on your credit score. The exception to this rule is when you shop for a loan over an extended time. Having your credit report pulled for one type of loan within a 45-day period ensures your score does not decrease each time your credit report is pulled. If you purchased a car after shopping for a loan within a short time frame, the inquiry had a minimal impact on your credit score.

Amounts Owed

One of the top three largest factors affecting your credit score is the amount of debt you owe. When you purchase a car, your debt is considered an added liability. Carrying balances on a long list of accounts can harm your credit score. Since your car loan is at its highest right when you purchase a new car, your score may suffer temporarily, but as you pay down the balance the negative impacts are lessened.

Payment History

The most important factor that influences your credit score is your payment history. When you obtain a new car loan, keeping your account in good standing is essential. Each month you make a payment on time, your credit rating improves. However, your payment isn't judged according to whether it is received by the lender's due date, but whether the payment is received within 30 days of the due date. Your credit score begins to drop once you are more than 30 days late on your car loan payment. The longer you make timely payments on your account, the more your score benefits.

Considerations

Buying a new car can be an exciting experience that brings many new financial considerations. As long as your car loan is affordable, you have the opportunity to improve your credit ranking through your installment loan. Keep a mix of revolving and installment credit accounts to maximize your credit improvements each month. Revolving credit includes credit and retail cards that report to the three major credit bureaus each month. Avoid obtaining new loans immediately after receiving a new car loan to avoid increasing your debt too much and harming your credit score.

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Can a Bank Freeze Your Account if You Owe Money on Your Credit Card?

Creditors of all types, including credit card companies, have a variety of methods at their disposal to secure repayment of a debt. Typically, these methods can be employed only if the debtor is not paying back the loan on time and the debt has become delinquent. While a creditor will usually not resort to the most severe collection methods immediately, if the debt is large enough, he may employ serious legal measures, such as bank account seizure.

Credit Card Debt

Credit cards allow individuals to access a line of credit from a financial institution. When the person draws money against this credit line, she is obligated to pay it back according to terms agreed to when she first got the card. A typical agreement with a credit card company will outline penalties for late payment. Only when an account becomes severely delinquent will a credit card company initiate serious collection actions.

Civil Judgments

To initiate most collection actions against an individual, a credit card company will have to establish in court the fact that the borrower owes the company money. A failure to pay back a credit card company constitutes a breach of contract, and the credit card company has the right to seek damages for this breach. To seek these damages, the credit card company may file suit against the individual in civil court.

Motion to Freeze

If a judge finds that the credit card company is entitled to damages --- usually equivalent to the amount the debtor owes the company --- the debtor will usually be ordered to pay the debt. If the debtor refuses to pay, the company is allowed to file motions to get payment in several ways, such as freezing the person's bank account and taking out funds. If a judge orders a bank account to be frozen, the debtor's bank must comply with the court's order.

Exemptions to Freezing

Even if a bank account has been ordered frozen, the freeze may not be entirely legal. Under federal law, funds generated from a number of sources, including through federal benefits, cannot be frozen. In addition, both federal and state laws protect people with low incomes from having their accounts frozen. If a bank account has been wrongfully frozen, the debtor can petition a judge to have the freeze removed.

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