This article contains a list of 10 questions to ask a debt settlement company before you join a debt relief program.
As you might have noticed from our customer reviews, people either love or hate their debt settlement company. There are two reasons for this.
- They chose the wrong debt settlement company for their financial situation.
- Or/and they have unrealistic expectations about the benefits and disadvantages of a debt settlement.
This article provides a cheat sheet with ten questions you should ask a potential debt settlement company to make sure it’s a good fit for you. Read this guide for a comprehensive discussion of the pros and cons of a debt settlement.
The 10 Questions You Should Ask Before Hiring a Debt Settlement Company
If you are deep in debt and you can only afford to make minimum payments, it makes sense to find out what your debt relief options are. If you decide a debt settlement is a good option for your financial situation, make sure you ask the following questions before committing to a debt settlement company.
Are you licensed to do business in my state?
If your agent doesn’t know or is evasive about this question, beware. Some states have special restrictions and requirements on the use of debt management strategies. For instance, Alaska and Alabama have no restrictions, but California, Connecticut, Indiana, and Colorado all require firms to place a surety bond and register with the attorney office.
Here is a list of current state regulations on debt management practices.
How long have you been in business?
Although a company that started last month will provide excellent service, you may want to let others take the chance first. Look for companies that have been in the debt settlement business for five years or more. You can check this on our review pages. While you’re at it, check their Supermoney rating.
Are you a member of the American Fair Credit Council or AFCC?
AFCC members agree to follow strict industry standards. Every year, the AFCC and a third-party verification firm audit AFCC members to ensure they are following the highest ethical and quality requirements. It is not a requirement for debt settlement companies to be AFCC members, but you have to ask yourself why a serious company would not want to be part of the largest trade association serving the industry.
How much do your services cost?
Although prices range depending on the services a company offers and the size of your debt, you want to make sure you get a clear answer. Typically, fees range from 18% to 25% of the enrolled debt balances. If your agent uhms and arrs about how much their services cost or how fees are calculated, proceed with caution.
Choose a debt settlement company that only charges fees when they have settled an account. If you even get the whiff that a company wants to charge you upfront fees before they settle your account, run.
Where will you deposit my money while I’m waiting for a settlement?
Debt settlement programs generally take 24 to 48 months to complete. During that time, debtors make payments in an escrow account. Once the account has enough money, the debt settlement company uses the cash to negotiate a lump-sum settlement with creditors.
Make sure your debt settlement company deposits your money in a bank that is FDIC insured. The account should be in your name, and you should have absolute control over the money in it.
Will you be making monthly payments to my creditors on my behalf?
This is a trick question. Debt settlements don’t make payments to creditors. The whole point of the debt settlement method is to save the money you were using to make minimum payments on your debts to save toward a lump-sum payment. If you continue making your payments, creditors have no incentive to accept a settlement. They will happily continue cashing your monthly payments for years or decades.
Can Creditors Sue Me?
This is another trick question to weed out companies that offer unrealistic assurances to clients. In some cases, creditors have the legal right to sue borrowers who are late on their payments. A debt settlement company worth its salt will try to negotiate with creditors to avoid this from happening, but no reputable company can guarantee this won’t happen.
How long will it take to settle my first account?
Although debt settlement companies cannot guarantee how long it will take a creditor to agree to a settlement, they should provide a rough estimate based on their experience. What you are looking for here is to ensure your company has a clear plan of action.
As long as you are regular with your monthly payments to the escrow account, you should get your first settlement within four to six months.
Can you stop my creditors or their debt collectors from calling me?
The answer you want to hear is no. If the agent assures you they will put a stop to creditor calls, hang up. It is impossible to guarantee this.
Will debt settlement hurt my credit?
Again, this is a reality check to separate serious debt relief specialists from scammers.
The right answer is yes. All debt settlement programs hurt your credit. Any company that claims it can guarantee creditors will not report missed payments to the credit bureaus is trying to scam you.
Now you know the questions that separate legitimate debt settlement companies from the scammers that give the business a bad name, you are ready to start checking companies. Supermoney has done part of the job by filtering the leading companies based on the factors mentioned above. Click here to get a free consultation with a debt relief specialist.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.