If you are scraping under a mountain of debt, you might be able to work with creditors and even debt collectors to make things more practical. This process is generally called debt negotiation. For instance, you may pay off a debt by having the creditor accept a lower amount if you pay an up-front amount, or perhaps you can negotiate lower payments could be temporary or permanent. Before approaching the creditor or collector, figure out the goals and pick a few negotiation strategies.
Also, sometimes, you might want help in dealing with your creditors. The articles provide information on the relief laws for negotiating repayments.
Debt negotiation programs state to cut your total debt
Debt negotiation organizations state to cut a consumer’s original debt in half through negotiations with the creditors or lenders. They inform you that they negotiated a settlement offer with your creditors. Fees can be fairly costly for a DNP, often covered with a final bill based on a percentage of debt saved. Keep in mind nothing, including bankruptcy, can brush off your personal loans, student loans, or child support debt. DNP companies cannot stop collection calls, create a debt repayment plan, or give your financial situation a clean slate.
Debt Negotiation: other common claims and risks
Most debt companies claim their services will not hurt:
- Your credit score
- Your ability to get future credit
But generally, debt negotiation programs put their customers with more debt or the damaging effects of a poor credit profile. Most creditors do not settle debts until they are several months overdue. This means many of the settlements come with conditions:
- Late fees
- Higher interest rates
- Delinquency notices
- Reporting negative information to credit reporting agencies (resulting in an even lower credit rating)
- Additional taxes
All of these options could hurt your credit. Also, not making your monthly payments could entail lawsuits, wage embellishment, or liens put on your home/other property by creditors. Not all DNPs are dubious, but you need to understand what you are getting into if you go this path. The DNP companies which are legal will negotiate with your credits as representatives and try to lower the overall debt, increase the time to pay them back, or try to negotiate a considerate deal for you.
State Laws and the UDMSA
Many states have passed laws controlling DNPs to different degrees, while some have taken up the Uniform Debt-Management Services Act (UDMSA).
- The UDMSA comprises but is not limited to, the following rules. DNPs must:
- Register as a consumer debt-management service
- Provide full disclosure of DNP terms and financial conditions
- Hold an insurance policy against fraud and theft
- Have annual renewal requirements for customers
- Divulge all fees, services, potential risks, and benefits to customers
- Provide credit counseling services by either a certified credit counselor or a certified debt specialist before setting into a DNP contract
- Allow customers a three-day right of grace period
- Keep payments set aside for creditors in a trust account
How to identify red flags for DNPs
Debt negotiation programs that do any of the following should elude from costs:
- Guarantee removal of all unsecured debt
- Promise that unsecured debts be settled for a fraction of the actual debt
- Claim that their program will save from filing for bankruptcy
- Charge for a percentage of the debt savings
- Ask to end all communication and stop making payments to creditors
- Claim that creditors do not sue debtors for stoppage of monthly payments
- Promise that the credit rating will not be negatively impacted
- Claim the ability to remove negative information from the credit report
Make sure you fully comprehend the terms of the contract before signing onto a debt negotiation program. Consider checking it out with your state’s Attorney General to be sure it is a legitimate company.
The Bottom Line
While the likelihood of negotiating a settlement should invigorate everyone to try, there is a good chance you will hear a “no” somewhere along the way. If so, ask your credit card company if it can lower the card’s annual percentage rate (APR), lower the monthly payment, or provide an alternative payment plan. Generally, a credit card’s debt settlement representative will feel bad for rejecting the offer and may be inclined to agree to one of these other options. Furthermore, another strategy to ponder upon, particularly if you owe a lot over many credit cards, is debt consolidation.