I’ve worked in the credit card debt relief industry for only a couple years, but I’ve also been in too much credit card debt myself. In fact, some poor financial decisions put me in a really bad spot. My credit was shot, and the monthly payments were higher than my monthly income!
It’s important to recognize that the process of debt negotiation (as a means of consumer credit card debt relief) is not for everyone – some borrowers are better suited for loan consolidation, while others have no choice but to file bankruptcy.
In this short post I want to give consumers a heads-up on how credit settlement works, and how to avoid unethical debt relief companies (commonly referred to as “debt negotiation” or “debt settlement” companies).
Read our update about the unethical practice of debt parking.
How Debt Negotiation Works
The goal for of a debt settlement negotiator is to obtain a settlement with your creditors. In general they usually charge 15% of the original amount you owe (sometimes 15% of the amount you end up paying).
It usually makes more sense for a creditor to offer you a settlement rather than go through the more costly option of debt collection.
Example: You owe a creditor $10,000 and the debt negotiator settles with your creditors for $5,000. A debt relief company takes 15% of the original amount which is $1500. So you’ll end up paying $6,500 of the original $10,000.
According to the FTC, a debt settlement company should not charge you a fee BEFORE they have negotiated a settlement with your creditors.
Beware of deceptive debt relief companies – they won’t fully explain the process to you, or may gloss over the downsides and only talk about the benefits. A basic question to ask is where their office is located or if they’re on LinkedIn.
Debt Negotiation Benefits (Pros)
The ultimate goal of using a credit card debt relief specialist is to save time and save money on what you currently owe your creditors.
By simply paying he minimum, with even a modest interest rate, you’re looking at 5+ years to finally become debt-free. Good debt relief companies will work with you, assess your budget, and recommend a program and monthly payment you can afford.
It depends on your situation, but a reputable company will help you get out of debt in 1-2 years.
Debt Negotiation Cons
The biggest drawback is that debt negotation will hurt your credit score in the short run – after you settle on a payback schedule it will be a few months or years before you can open another credit card.
It’s also imperative that IF you fall behind on your payments creditors are going to start calling and trying to collect the debt (again). From working in the industry, there’s no rhyme or reason to how many calls you will receive. Some may get only a few calls, while others get calls almost everyday – it’s something that you have to deal with if default on payments again.
What to Look for in a Debt Settlement Company
A lot of debt settlement/relief companies won’t have your best interest – they deceive consumers. Some say they’ll cut the amount owed by 70%, or that you’ll be debt-free within 6-months. My advice would be to use common-sense. You know how much money you owe. Do you think it can disappear in a couple months and a few payments?
No one can guarantee you a certain amount of savings, so if you hear a guarantee, run for the hills. No one in the industry can guarantee a settlement, or that they can 100% secure a settlement for you.
Unscrupulous credit card debt relief companies may try putting you on a payment program for 4 or more years, knowing full-well that you probably won’t complete the program. Companies who do this only care about making their fee, and if you default it’s like having a new customer to work with.
An honest debt relief company will closely review your debt-to-income ratio and make sure that they are putting you in a program that you can afford. They also fully explain to you the drawbacks as well as the benefits to joining their program.
In some cases you’ll save somewhere between 40-50% of what you owe (including of their fees).
Another good way to evaluate a debt relief/settlement company is to make sure that they are registered with the BBB (Better Business Bureau) and have good standing.
Hopefully after reading this article you a better understanding of how the process works, and what to look out for when choosing a credit card debt relief company.
If you want an honest evaluation of your current situation give us a call at 1-855-Jet-Debt and we can recommend a good debt company based on your circumstances.
Also visit our website to read some of our debt guides!
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