There is nothing quite as stressful as having more debt than the household income can comfortably deal with. When people find themselves with out-of-control debt they typically begin exploring ways to rid themselves of the debt. Refinance the house? File for bankruptcy? Some desperate ones have tried debt negotiation or debt settlement.
Consumers drowning in debt usually fall into one of these categories…are you one of them?
- Defaulted on their debt and in collections.
- Finding it difficult to make monthly payments and about to default on debt.
- Current with bills and capable of payments, but looking for a way out of paying.
Debt negotiation (sometimes referred to as debt settlement) was in vogue about 5 years ago but has since fallen out of favor. Not because it didn’t necessarily work, but because companies that offered this service usually didn’t disclose to the consumer all the ramifications. As a consequence, the federal government stepped in and mandated very strict rules governing the industry… rules that were so difficult to comply with that most of these companies simply went out of business, which is probably what the consumer-rights agencies were hoping for.
How Debt Negotiation Works
Debt negotiation or Debt Settlement works like this:
The company’s service typically lasted 3 years and involved corresponding with the creditor on behalf of the consumer. The idea was to come up with a negotiated amount that was less than what was originally owed. Okay, so far so good.
Secondly, the company would budget the client so that a certain amount of money was going into a savings account that would eventually be used to pay the negotiated amount. (The most unscrupulous debt negotiation companies would bank this money for the client). Another way was for the client to create their own savings account.
Again, the purpose of the savings account was to pay off (eventually) the negotiated amount that the company would arrange for the consumer with their creditor. A “supposed” amount, typically 45-50% of the original debt, would have to be saved and then it would be offered to the creditor. Meanwhile, the consumer had to pay the company as much as 20% of the debt while they were saving for the negotiated amount. So let’s put a pencil to those two figures…
A consumer has a $50,000 debt with credit cards. Their minimum payment is about $1600 a month. The company charges 20% of the balance, which, in this example is $10,000 for their services. This was stretched out over the 3 year contract or about $278 monthly.
The company also instructs the consumer to set aside (or send to the company) about 10% of the debt amount (another $278 monthly). This presumably would end up being 40% of the original balance and would be given to the creditor after the 3 years had ended when the total negotiated amount had been saved.
So would a consumer get excited about this? Of course they would! They are trading a $50,000 dollar debt for only $20,000 dollars (not counting cost to the company)! And now the monthly payment is a comfortable and affordable $556 a month instead of the $1,600 monthly that the consumer was struggling to pay. Ah, yes! Thank goodness for debt negotiation! Finally, relief from overwhelming debt! Who wouldn’t take that deal?
But something was about to go terribly wrong…
Please watch for our next blog to see what happens next!