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Debt Settlement Article
Be Aware Of Debt Settlement Pitfalls for reducing
Credit Card Debt
by Zip E News
If you're thinking about using a
consolidation company or a settlement service to help you get out of debt
faster and save money on your monthly payments, make sure you do
your homework before choosing a company. There are definitely shams
and scams out there.
First let me say that debt consolidation is not
the same as "debt settlement" or "debt negotiation", which most people
don't realize.
Settlement companies charge hundreds of
dollars as an initial administration fee to set up your account, plus a
monthly service fee. The fees vary depending on the company and the
amount of your credit card indebtedness.
Such companies take your money every month, but
don't make monthly payments to your creditors! Instead, they put it
in a trust account, negotiate your payments with your creditors, then
make a lump-sum payment when there's enough in your account to pay a
creditor in full.
ADS
Debt Settlement has devised a membership driven web site to
eliminate fees and still provide a quality informational site to
guide the member to successful negotiation
That can take *years* depending on the amount of
debt you have with each creditor. Meanwhile, you can be sued by your
creditors and your wages can be garnished! (Or just don't make
payments to your creditors. You'll end up in the same spot without
paying someone to help you get there!)
Settlement companies don't ask your creditors to
stop all interest, late fees and over limit fees from accruing. That
means while the negotiations are ongoing, your bills will continue
to grow! So if you're sued and a judgment is brought against you,
you'll owe more money than before!
And shoddy companies, which there are a lot of,
don't tell you *any* of this up front. I call it "getting permission
by omission" because they simply don't tell you how their program
works *before* you sign an agreement with them. Or after, for that
matter. But if you ask the right questions, eventually you'll figure
it out. (Or when the crap hits the fan. Whichever comes first.)
Let me give you an example of how debt settlement
works.
Let's say you have $20,000 in unsecured credit
card debt. You owe $10,000 to one credit card company, $6,000 to
another and $4,000 to a third. You agree to a 5 year plan where you
pay $250 a month to the settlement company. (After all, $250 a month
for 60 months is only $15,000, so you're saving $5,000 and you'll be
debt-free in 5 years, right?)
The administration fee will cost you $750. Your first 3
monthly payments go towards that and nothing gets put into your
trust account until your 4th month.
The settlement company keeps $50 of your $250
payment each month for the service fee. That means $200 a month is
being added to your trust account.
Most settlement companies claim to be able
to negotiate your debt for about 50% of what you owe. So let's use
the lowest credit card debt as an example.
If you owe $4,000 and your creditor agrees to
accept $2,000 as payment in full, it will take 10 months at $200 per
month to have enough in your trust account to pay off just that one
credit card.
But remember, your first 3 payments to the
settlement company only paid the admin fee. That means your first
credit card settlement is 14 months *after* you started sending them
money.
So what's the problem? It's simple. Your creditor
won't agree to accept half of your actual debt unless, or until, it
can be paid in full. Otherwise, you're expected to make your normal
monthly payments.
Since you don't have $2,000 in your trust
account, and you won't have it until more than a year after you
stopped paying your creditor directly, they'll probably take you to
court and request that your wages be garnished long before you have
that $2,000 built up.
And what about your other creditors? Well,
they'll be waiting even longer to get their money from the
settlement company. The $6,000 debt will take 15 *more* months to
pay off, assuming your creditor waits that long and agrees to 50%.
And that $10,000 bill? You do the math.
On the other hand, if you signed up for a 3 year
plan with the settlement company, your debts would be paid off
sooner. But, the question is, will your creditors wait that long?
Probably not.
The facts are, you can negotiate with your
creditors yourself. Most will agree to take a smaller monthly
payment from you and stop all interest and fees from accruing. And,
of course, you'll save thousands of dollars in fees to a settlement
company.
Before signing up for any service, please be sure
you check out the company thoroughly. And don't let the words
"non-profit" fool you either. Alot of debt settlement companies
claim to be non-profit.
Going back to the example above, if you pay them
$15,000 over a 5 year time frame and they settle your debts at half
of what you owed, they'll make $5,000 from you. I'd call that a
profit, especially since they might not have actually helped you in
any way.
Most companies will allow you to cancel your
account and get a refund of what you've paid, less the
non-refundable admin fee and the monthly service fees. If you feel
you've been mislead about their program, don't hesitate to argue til
the cows come home. File a complaint with the Better Business Bureau
or hire an attorney if you feel you're getting nowhere.
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