|
By Lucy Lazarony • Bankrate.com
Stressed out and looking for relief from high credit
card bills?
Beware of companies that promise to cut your bills
in half by negotiating lower payoff amounts from creditors.
Sign on with a debt negotiator or debt-settlement
company and your credit rating and your wallet could take some
serious hits. If high fees and trashed credit aren't bad enough,
you may also owe taxes on any debt that gets wiped away.
It's easy to wind up in worse financial shape than
when you started.
"Be very, very careful. Because there can
be substantially more harm than good," says Paul Richard,
executive director of the Institute of Consumer Financial Education
in San Diego.
"It's the fees, the possible liability to
the IRS after you get this negotiated and they're not doing anything
for you that you can't do yourself.
"These slick debt negotiators, they smooth
talk people around all these issues. They're really taking advantage
of people."
Fees, fees, fees
Let's start by taking a closer look at the fees. Some debt negotiators
charge hefty upfront fees. Others charge fees based on the amount
of debt you owe or the number of credit accounts you have. Many
also charge fees based on the amount of debt a creditor agrees
to wipe away.
"There are all these hidden charges going
on," says Daniel Benson, a senior consumer attorney at the
Legal Aid Society of San Diego.
Let's say a creditor agrees to settle for $4,000
of the $5,000 you owe. You've saved $1,000, but a debt negotiator
will want a big cut, often 20 to 35 percent, for themselves. That's
not much of a deal, especially when you toss in the other fees
that you have to pay.
One of Benson's clients learned that lesson the
hard way. She's 82, single and had $2,128.81 of debt she wanted
to settle with the help of a debt negotiator. The company charged
her an initial application fee of $250 and an initial legal processing
charge of $1,345. That's $1,595 in fees right off the bat for
help with just over $2,100 in debt.
Talk about a lousy deal.
The hit to your credit rating
Sky-high fees are only part of the problem when you do business
with a debt negotiator. Your credit takes just as much of a hit
as your wallet.
Here's why. Often, a debt-negotiating company will
tell you to stop making payments to creditors and to send money
to them instead. The money gets placed in an account until the
debt negotiator decides to make an offer to a credit card company.
And that could take awhile, especially if you pay
a negotiator through monthly payments rather than forking over
a large sum upfront.
It could be several months before a debt negotiator
has collected enough money from you to make a settlement offer
to a creditor.
And after several months of not paying your creditors,
your credit will be trashed.
"They tell you to stop talking to creditors,
which is a bad idea," says Dianne Wilkman, president of Springboard,
a nonprofit, consumer credit management company in Riverside,
Calif.
"Your creditor will charge off your account
and that will ruin your credit."
Creditors typically write off or charge off a debt
if there has been no payment on the account for more than 180
days or six months. A charge off will remain on your credit report
for seven years plus 180 days from the date of the first nonpayment,
according to the Fair Credit Reporting Act.
"A charge off is the biggest negative red
flag on your credit report," Richard says. "It means
a lender lost money doing business with you."
So even if a debt negotiator is able to lower a
credit card balance as promised, you could be stuck with a dismal
credit record for more than seven years.
Here's another thing to worry about. If a creditor
refuses the settlement amount offered by a debt negotiator, you
could be sued.
Just ask Raquel Avila, of Millbrae, Calif. She
signed on with Debtco in August 2001 for help with $10,000 of
debt spread over five credit cards. The card debt was left over
from her university days.
"I was just making the minimums. I foresaw
myself paying this debt forever, paying the minimum. That's why
I went to them," says Avila, 28.
She paid Debtco a $1,000 upfront fee and agreed
to $250 monthly payments. Debtco would also take a 25 percent
cut of any forgiven debt.
She stopped paying her creditors and sent payments
to Debtco instead. She was told she would be debt-free in three
years.
Last July, one of her creditors sued her for nonpayment.
"I ended up getting summoned in July and I
got scared," Avila says.
"I was never told this could happen. They
said there are some creditors that want their money right away
and that I should talk to a lawyer."
She ended up settling the disputed debt in November.
"At the beginning I didn't feel it would hurt
my credit this much," Avila says. "I feel like it's
hurting me more now."
After 19 months with Debtco, she still owes several
thousand dollars on three credit cards.
"They're basically telling me I need to send
them more money," Avila says. "I don't really foresee
myself getting out of this, this year."
Steve Dahl, a senior vice president of sales and
marketing at Debtco, says only a small percentage of Debtco clients
get sued and most settle the suits out of court.
"Probably less than 9 percent of our consumers
ever get sued," Dahl says. "That's a reality. We put
that in our contract. We always let people know that's a possibility."
Getting angry calls from collection agencies is
another unpleasant reality associated with debt-negotiation programs.
"This is boot camp to avoid bankruptcy,"
Dahl says. "It's tough and it can be nasty."
A long and expensive road
Resolving debt through a debt negotiator is a long and expensive
road. Even if all goes well, you'll be left with a banged-up credit
record and you may owe taxes on any debt that is wiped away. This
article from Bankrate.com explains the tax consequences of forgiven
debt.
Not all debt negotiators are on the up and up.
Some consumers pay high fees and never get any of their debts
settled through a debt negotiator or debt-settlement company.
"There are nonprofits and for-profits in this
business with various degrees of credibility," Wilkman says.
The latest debt negotiator in the hot seat for
allegedly shoddy business practices is Briggs & Baker, based
in Santa Clarita, Calif. The California Attorney General filed
a lawsuit against Briggs & Baker on Feb. 19.
"This firm and its ads preyed on consumers,
who paid thousands of dollars to rid themselves of crushing debt,"
says California Attorney General Bill Lockyer. "Instead,
Briggs & Baker left its customers with more debt, ruined credit
histories and sometimes no choice but to file for bankruptcy."
People with just a few thousand dollars of debt
would do well to steer clear of debt negotiators altogether. A
debt-management program may be a better option.
When you enroll in a debt-management program, you
write a monthly check to the credit-counseling agency and the
agency pays your creditors. In a typical debt-management program,
a card issuer will charge lower interest rates, stop charging
late fees and contribute money to the debt-counseling agency.
A debt-management plan usually lasts three to four years.
A visit to a reputable credit-counseling agency
may help you determine if a debt-management plan might be right
for you.
Be sure to choose your counseling help carefully.
There are some pretty shady operators running so-called counseling
agencies these days. For tips on finding the right kind of credit
counseling help, check out this article from Bankrate.com.
Do-it-yourself debt help
There are plenty of things you can do to get a handle on your
debts all on your own. These pay-down strategies from Bankrate.com
are a great place to start.
And you may be able to get lower interest rates
on your credit card accounts by picking up the phone, calling
your creditors and asking.
You don't need perfect credit to get a rate reduction
from your card company but you do need to ask. Not sure what to
say? This Bankrate.com article is full of tips.
You may be able to negotiate a lower payoff amount
from a credit card company on your own as well. You'll never know
if you don't call and ask.
"Most creditors are willing to work with consumers,"
says Edward J. Johnson III, president of the Better Business Bureau
in Washington, D.C. "Their interest is in getting the money
back."
So give your creditors a call and ask for a lower
payoff amount.
Richard has worked with consumers who were able
to settle card accounts by paying 60 percent of the balance. All
they did was call and ask.
"They can do this themselves. The creditors
are willing," Richard says. "You don't need to hire
someone and pay a lot of fees."
But you do need to have plenty of cash available
to make a settlement offer. If you don't have the cash, try asking
for a break on your monthly payment amount or a lower interest
rate.
If you're still game to try a debt-negotiation
program, be sure to choose the company carefully.
Contact the Better Business Bureau to see if the
firm has had any consumer complaints. Check with your state attorney
general's office or other state consumer agencies to find out
if there are any pending legal investigations.
"Look into these places," says Deanne
Loonin, staff attorney with the National Consumer Law Center in
Boston. "What are they doing for you first of all? What kind
of track record do they have?"
What kind of fees do they charge? Are there upfront
fees? How much do they charge for negotiating a lower payoff amount
with a creditor?
Don't forget to check for debt negotiation programs
run by credit-counseling agencies. These programs tend to charge
lower fees.
Be sure to run a background check on a credit-counseling
agency before your first visit. Not every nonprofit counseling
agency has your best interest at heart.
More
Debt News
|
