Debt Negotiation Programs

What is a debt negotiating program?

Consumers with financial problems are often contacted by debt negotiation companies that claim they can drastically reduce a consumer’s debts.  A debt negotiation program differs from credit counseling or a debt management plan, and it can be a minefield to work through without causing damage to a credit score.  If a consumer is thinking of signing on with a debt negotiating firm, the consumer needs to educate himself or herself on what a debt negotiating program involves, and then do a thorough investigation of the company. Consumers need to be aware of the many pitfalls associated with this industry as many illegal and questionable activities have surrounded it. To protect the consumer, many states have enacted laws to regulate the companies.

Beware of false claims

Debt negotiation companies are adept at appealing to the financially strapped consumer. They often claim that they are nonprofit organizations, and many consumers have been bilked by firms who made such untrue assertions. There biggest enticement to consumers are claims to negotiate drastic reductions of the consumers’ debt with their creditors. They may claim the ability to reduce a consumer’s unsecured debt—credit card debt, student loans, medical bills—from 10 to 50 percent of the amount owed. For instance, a debt negotiation company may advertise that they can reduce a debt of $20,000 to $10,000.

Debt negotiation companies frequently frame their advertisements as an alternative to filing for bankruptcy. They also can make claims that negative information can be removed from the consumer’s credit report when they have completed the program. Consumers who sign up are usually told to stop making payments to their creditors and send their payments to the debt negotiation company, where the money is kept in a special account and the company makes the payments.  Furthermore, these companies say there will be little or no affect on the consumer’s ability to secure credit in the future.

Proceed with care

All claims made by a debt negotiation company should be checked for accuracy as many consumers have been duped by such firms. These companies cannot guarantee creditors will reduce the amounts that they are owed, yet they do make these claims. And as consumers are advised to stop paying on their accounts, late charges and interest charges will further increase the debt. These amounts can quickly double or triple in a short time if payments are not made.

By law, creditors are not obligated to negotiate debts with consumers or companies representing them. However, they have an obligation to provide correct information to the three credit reporting bureaus. If the consumer stops making payments on credit accounts, this information will be entered on the consumer’s credit report. In addition, the creditors have a right to sue the consumer to recover the amount owed them, and in successful lawsuits, they can put a lien on the consumer’s house or garnish wages. Also, if the debt negotiating company reduces any amount owed, the Internal Revenue Service may consider this to be taxable income.

Finally, consumers need to be aware that debt negotiation companies often charge costly fees for their assistance. The fees can include charges for the account established by the debt negotiator, monthly service fees, and percentage fees of the amount that consumers are saved by the services.

Sales pitches to avoid

If the consumer is considering hiring a debt negotiation company, they need to avoid those that use the following practices:

  • Claim negative information can be removed from the consumer’s credit report. In reality, all accurate information must stay on a report for seven years and bankruptcies are listed for ten years.
  • Make assertions unsecured debts can be drastically reduced for pennies on the dollar. In reality, creditors are not required by law to make any negotiations on legitimate debts, and they can sue the consumer to recover what is owed them.
  • Say their fees are inconsequential and are not explained. Debt negotiation companies are known for their  substantial monthly service fees and for taking a percentage of the amount that they say was saved by the consumer for using their services.
  • Advise the consumer to stop making payments and cease communicating with their creditors. In reality, if payments are not made, late charges and interest will be added to the accounts, raising the prospect of the consumer exceeding his or her credit limit where more fees are added. Also, credit report scores will drop since this information will be sent to the credit reporting bureaus.
  • Report that creditors never sue consumers for their unsecured debts. In reality, creditors have the right to sue and recover legitimate debts.

Even if the debt negotiation company seems to have passed all the above conditions, the consumer still needs to do a background check on them with the Better Business Bureau, the state’s attorney general’s office, and the local consumer protection agency.

References:

1. Federal Trade Commission, Debt Relief Services, http://www.ftc.gov/bcp/edu/microsites/moneymatters/dealing-with-debt-relief-services.shtml

2. Federal Trade Commission, Facts for Consumers, December 2005, http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm