A whopping 46 percent of Americans say that they would not be able to cover a $400 emergency without selling something or borrowing money. They are treading water financially, just one problem away from going under. Others are already sinking and looking to debt settlement as a potential way out of financial ruin. How does that happen? Consider the case of Joe and Nancy.
Joe and Nancy are a typical American couple. They have been married eleven years and have two girls, aged 8 and 6, and a boy, aged 4. Both Joe and Nancy started working right out of college. For the first two years of their marriage, they were able to put aside some savings, even though they were both paying off student loan debt at the time.
But then, their children were born, and they soon found that their budget was a bit too tight. They stopped putting any savings aside. Figuring that they would find a way sometime in the future to catch up on their savings plan, they were not too worried.
When Financial Disasters Strike
Then, disaster struck. Joe was injured in a car accident. Soon the bills began to pile up. Joe found himself unable to work for several months because of his injuries. Nancy kept working, but her salary was not enough to handle the family’s necessities. The couple began to turn to their credit cards to supplement Nancy’s meager salary.
Joe’s injuries are healing. But their finances are not. Joe and Nancy are now over $30,000 in credit card debt. Even worse, since Joe is only able to work part-time right now, the couple cannot make their minimum credit card payment each month. They have missed the payments for three months now, and Nancy is afraid to answer the phone, knowing that a bill collector may be on the line.
They never dreamed they would have to make this kind of decision, but Joe and Nancy have chosen to try debt settlement as a way to get back on track and save their financial future. Now they face another decision. Should they negotiate with their credit card companies by themselves, or should they work with a debt settlement company to do so?
Perhaps you or someone you know is in a similar situation. This guide will help you decide whether to handle debt settlement as a DIY project or get help from a professional debt settlement company.
What can you do to settle debt yourself?
You can try to settle your debt on your own if you know enough about financial matters and you have the patience and time to do it yourself. Sometimes, taking a DIY approach will save you money in fees, but you may not negotiate as good a deal as a professional debt relief specialist.
Here’s what you need to know:
- You have rights when it comes to debt collection. For instance, there are limits to when and where a debt collector can call you. A debt collector cannot legally harass you or any third party they may contact about your debt.
- Credit card companies have rights, as well. They don’t have to accept a settlement simply because you ask them to do so.
- If you negotiate on your own, make a reasonable offer. Although you should expect some haggling, lowballing your creditors can backfire on you.
- Before making any payment agreed upon, make sure you get the agreement in writing from your creditors. Do not leave this step to chance.
- Get ready for a long and painful negotiation process. Credit card companies are understandably reluctant to lower your payment amount and may not do so the first time you ask.
Under what circumstances might it be better to hire a debt settlement company?
There are a variety of circumstances that may make it best to hire a debt settlement company. For instance, you may decide that you simply cannot handle the stress involved in negotiating. If you do not feel comfortable haggling over dollar amounts, DIY debt settlement is not for you.
You may find it very hard to talk with your creditors about whatever situation landed you in financial hot water. Because you are emotionally attached to the issue, it can be very difficult to maintain calm control when talking with your creditors.
Additionally, you may simply lack time to negotiate properly. Debt settlement is often a lengthy process that requires an investment of time and energy that you might not be able to give. Some have found it difficult to find the right person in the creditor’s organization to handle the matter.
Also, because you may owe multiple creditors, you must enter into separate negotiations with each creditor, which can be a lengthy, tedious process.
The truth is that your creditors have abundant reason to make it unpleasant or difficult to get negotiations started in earnest. Here is where a debt settlement company can sometimes work wonders.
How can a debt settlement company help?
Debt settlement companies negotiate with credit card companies every day. It’s what they do. A reputable debt settlement company that has been in business for a while has built up relationships with credit card companies that will work to your advantage. Debt settlement companies know exactly who to call to get the negotiation ball rolling.
Debt settlement companies can approach creditors dispassionately. When emotion is taken out of the equation, you may benefit from getting a lower settlement offer. Because a debt settlement company knows how to craft a settlement proposal that creditors will truly consider, you will be more likely to reach a settlement agreement.
Sometimes a debt settlement company may reduce the number of calls you receive from collections agencies. While no reputable debt settlement company will promise to eliminate all creditor calls, at least some of your creditors may stop calling once the company begins negotiations on your behalf.
Compared to trying to settle your debt on your own with multiple creditors, the main benefits of using a debt settlement company are that your settlement amount will likely be much lower, and you will also save significant time and effort.
What should you look for when hiring a debt settlement company?
There are many unscrupulous debt settlement companies that prey on consumers in financial trouble. When looking for a debt settlement company, here are some details to iron out:
- Ask your debt settlement company whether it is fully accredited with the AFCC. Accredited members of this organization are audited annually and must prove that they comply with all FTC guidelines for the industry.
- Ask your debt settlement company if it is licensed to do business in your state.
- A reputable debt settlement company will never request that you pay a fee upfront. The company will also provide you with their service agreement and policies before requesting any personal financial information from you.
- During your consultation, an agent of a reputable company will discuss all your options with you. This includes a clear description of the pros and cons of any solution suggested. You are free to ask questions and request evidence or proof of any claims made by the company.
- Your debt settlement company should provide you with a detailed timeline of when and how your debt will be settled.
- The company should ask for your approval before they send a settlement agreement to your creditors.
Here is 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 debt settlement companies based on the factors mentioned above.
How much does it cost to hire a debt settlement company?
Some debt settlement companies may charge a flat rate for their services. Typically though, firms base their fees on a percentage of the debt balance. Your debt settlement company may require a certain percentage of the total debt amount you need settling. Or they may require an agreed-upon percentage of the settled amount of the debt.
In any event, your debt settlement company should be transparent in its pricing policy. The company should advise of the way in which it calculates fees before you sign any agreement.
Where can you find a legitimate debt settlement company?
You can find reputable debt settlement companies in a number of ways.
- Get recommendations from family or friends who have used debt settlement companies in the past. A good word-of-mouth referral is priceless.
- Check with the Better Business Bureau. This organization will tell you about any consumer complaints or court cases against the debt settlement company.
- Read reviews from respected sources like SuperMoney.
Remember, there is no obligation to hire the services of our debt relief specialist. Invest 15 minutes of your time and find out what options are available. Get a free debt settlement consultation today.