Unfortunately, it’s easy to become confused about debt management and debt settlement. There are a lot of conflicting claims out there in terms of what debt management or debt settlement could do for you. We have seen claims from debt settlement companies that they can get your debts reduced by 60% or more. This is a bald-faced lie. There are legitimate pros and cons to debt management and debt settlement but the net/net is that either one can be helpful if done correctly. What this essentially means is choosing the right company (more about this later).
What is debt management?
What the term debt management usually means is going to a consumer credit counseling agency for help when you can’t pay your creditors even the minimum monthly payments required. When this is the case you will have a debt counselor that will help you organize your finances so that you can pay your lenders. This person should spend at least 45 minutes to an hour with you discussing your finances and you should ultimately have a written action plan. The best consumer counseling is free.
In the event that credit counseling won’t solve your problems your counselor will help you develop a debt management plan or DMP based on what you could afford to pay your creditors. Your counselor will contact your lenders to see if they will accept your debt management plan. If all or most of them agree to it you will no longer be required to pay them. Instead, you’ll send one check a month to the credit counseling agency and it will pay your creditors per your debt management plan. While a DMP has helped thousands of people get out of debt it’s important to understand that it generally takes five years to complete one and you will be charged a monthly maintenance fee although it’s likely be $25 or less. Plus, you’ll be required to give up your credit cards and you will be strongly encouraged to not take on any new debt until you have completed your plan. These are the reasons why nearly 50% of those people that agree to a DMP never complete their plans.
What is debt settlement?
The simplest explanation of debt settlement is that it’s where you contact your creditors and agree to make lump sum payments to settle your debts but for less than you actually owe. It will require some amount of negotiation but it’s often possible to settle a debt for 50% of its face value. To do this yourself you will need to be a tough negotiator and have the cash in hand to pay for any settlements you are able to negotiate. In fact, if you can’t pay for the settlement immediately, either via a wire transfer or certified cashier’s check, it’s unlikely that any lender will agree to settle with you. You also need to be at least four or five months behind in your payments and be able to prove to your creditors that you have a serious financial hardship and that if they refuse to settle, you will be required to declare bankruptcy. You don’t actually have to be really close to filing for bankruptcy but you need to be able to convince your lenders that this is a real possibility.
Hiring a debt settlement company
The harsh truth is that people who are seriously in debt rarely have enough money just sitting around they could use to pay for any debts they can settle. In addition, many people just can’t face up to the idea of trying to negotiate with their lenders. When this is the case, the best option is probably to hire a debt settlement company. Naturally, this would cost you money as no reputable debt settlement company is going to work free. However, the money that one of these companies saves you should more than offset its charges. Some debt settlement companies charge a percentage of what they are able to save you. The reputable ones tend to charge a flat fee of 15% to 25% depending on the amount of your debt. Let’s say that you owe $20,000 and the settlement company charges you the maximum of 25%. This means its fee would be $5000. However, if it is able to reduce that $20,000 down to $10,000 through debt settlement you would come out $5000 ahead even after paying the $5000 fee. In addition, reputable debt settlement companies don’t charge anything until they have settled all of your debts and you have approved all their settlements. Some such as National Debt Relief have a 100% satisfaction guarantee, which is that if you are dissatisfied for any reason at any time you can cancel out of your program and you won’t be charged a single dime.
Choosing a debt settlement company
There were times when the Internet was like the wild West and some debt settlement companies were the guys in the black hats – charging big upfront fees, failing to deliver on their promises, closing up shop and then reappearing in a few months under a different name. The FTC (Fair Trade Commission) has clamped down on many of these companies but there are still some out there so you need to be careful in choosing one. Here are some of the criteria to use when evaluating a debt settlement company.
- Does it belong to the Better Business Bureau? If so what is its rating?
- Has it been in business for more than five years?
- Does it belong to the American Fair Credit Council, which is the watchdog of the debt settlement industry?
- Does it have a lot of online reviews you could read?
- Does it not charge any upfront fees?
- .Are its counselors friendly and seem to really want to help you instead of just trying to sell you their services?
If you can answer yes to all of these questions then you’ve probably found a good, reputable, ethical debt settlement company to help you.
Get everything in writing
You’ll have an initial discussion with a counselor at the debt settlement company who will discuss your options and help you decide if debt settlement would be your best choice. In some cases the two of you may decide the answer to this is “no” and that you would be better off getting a debt consolidation loan, going with consumer credit counseling or in a worst-case scenario filing for bankruptcy. If you do decide that debt settlement is your best option the settlement company will send you a contract or agreement to sign. It should set out in detail what the debt settlement company will do, what you will be required to do, the terms of your debt settlement plan and how much it will cost you. This agreement should be written in clear, easy-to-understand language. If not, you might want to find a different debt settlement company, as those “bad guys” will often use tiny print and confusing, incomprehensible language to try to hide their fees. If the agreement is written in clear language but you still are not sure you understand everything it might pay to spend a few hundred dollars to hire an attorney to review the agreement for you. This is money that could be very well spent.