Educational Consumer Tips

Debt Negotiators/ Debt Settlements

Author: Better Business Bureau
Published:

Debt negotiators or debt settlement companies promote their services to reduce a consumer's debts and pay them off. Some debt negotiators are known to charge hefty upfront fees. Others charge fees based on the amount of debt you owe or the number of credit accounts you have, or they may charge fees based on the amount of debt a creditor agrees to wipe out. As of October 27, 2010 for-profit debt relief companies are prohibited from collecting advance fees for their services. Fees can only be collected once the company has resolved the consumer's debt. Some businesses may request the consumer set aside money in a dedicated account. Dedicated accounts must be maintained by an insured financial institution who has no ownership, control or affiliation with the debt relief company. The financial institution is prohibited from receiving any referral fees from the company. In addition, the consumer maintains ownership over the funds in the dedicated account, and is not penalized for early termination of the debt relief program.

Companies offering services as a prorater to California residents are required to register with the California Department of Corporations. A general prorater contracts with delinquent debtors and intercedes with creditors to settle debts on behalf of the debtor. A special prorater pays its customers' bills as part of its management of its customers' affairs, and is generally a business agent or a manager. General Proraters must maintain a minimum of $10,000 net worth and a surety bond of $25,000. For those licensees who use agents, the requirements are considerably higher.

While avoiding bankruptcy, debt negotiation will leave many charge-offs on your credit file, which to other creditors, and future potential lenders, can look just as bad as bankruptcy. Often, a debt-negotiating company will tell you to stop making payments to creditors and to send money to them instead. The money gets placed in an account until the debt negotiator decides to make an offer to a creditor. If you are paying
monthly payments to the negotiator, it can take months before enough money is collected from you to make a settlement offer to a creditor. And, after several months of not paying your creditors, your credit can be ruined. Write-offs or charge-offs can stay on your credit report for seven years.

Also, debt amounts written off may cause problems for consumers with the Internal Revenue Service, because the amount of debt that is forgiven may be viewed as income to the borrower.

If you feel you need help with your finances, you may want to visit with a certified credit counselor with a reputable,
accredited, consumer credit counseling service. Consumer credit counselors encourage consumers to make every effort to pay their
debts. With the help of a certified credit counselor, who seeks reductions in interest charges and payments as part of an
overall plan to pay off the debt, consumers can avoid bankruptcy and ruining their credit standing.