Debt Negotiation and Settlement
For anyone who is overwhelmed by debt and possibly considering bankruptcy, getting advice about how to deal with debt may be a good idea. Credit counseling and debt management organizations may be able to assist individuals looking for a way out of their financial problems. However, you need to beware of scams and dubious "credit repair" schemes that also exist in growing numbers. Below are links to helpful resources for help in finding legitimate credit counseling services, as well as how to avoid scams and expensive mistakes. Choose a link from the list to get started.
Debt Negotiation Programs
Debt negotiation programs (DNPs) are the last resort for those struggling to manage their debt. These programs should not be confused with credit counseling or debt management plans (DMPs). Although some DNPs are legitimate and may provide significant benefits to some debtors, many DNPs can cause more trouble than they are worth and result in long term harm to the debtor's credit rating. DNPs may refer to themselves as "debt settlement companies" and make grand claims about their ability to reduce debts significantly. These companies often charge steep fees for this service as well as a final bill based on the percentage of debt purportedly eliminated.
Since creditors often refuse to settle debts until they are several months overdue the result can be significant harm to the debtor's credit as well as the possibility of lawsuits, liens, and wage garnishment as well as late fees, higher interest rates, and collections attempts. The amount of debt saved in these negotiations may also be considered taxable income by the IRS. Some common red flags that should indicate that a DNP should be avoided include:
- Guarantees that all unsecured debt can be eliminated;
- Promises that unsecured debts can be paid off at a fraction of the actual debt;
- Claims that a DNP can save the debtor from filing for bankruptcy;
- High monthly fees;
- Fees for a percentage of supposed debt savings;
- Requests that you cease communication with and payment to creditors;
- Claims that creditors rarely sue debtors for payment stoppage;
- Promises that your credit rating won't be negatively impacted;
- Claims that negative information can be removed from your credit report.
Avoiding Credit Repair and Credit Counseling Scams
Over a million Americans file for bankruptcy every year and the average household debt is at an all-time high. It should come as no surprise that companies have appeared that play on the concerns of the many consumers concerned about their debt and credit score. "Credit counselors" and "credit repair companies" have proliferated. Many of these organizations conduct business in an unscrupulous manner that takes advantage of unsuspecting consumers. The following are some red flags to look out for so you don't get taken by these shady operators.
Credit Repair Scams
- Fees before services are provided;
- No information provided about consumer legal rights or actions they can take themselves for free;
- Recommendations that the consumer NOT contact a credit bureau directly;
- Suggestions a consumer get a "new" credit report by applying for an Employer Identification Number to use instead of their Social Security Number;
- Advice that the consumer dispute all the information on their credit report or otherwise engage in fraud.
Credit Counseling Scams
- Promises that sound too good to be true;
- Complaints filed against the business with state consumer agencies or the local Better Business Bureau;
- Generally speaking for-profit credit businesses are more suspicious than nonprofit credit businesses;
- High fees and monthly service charges;
- Unclear contract terms.