Debt Settlement ~ A Deeper Look
Updated: Oct 15, 2019
Debt Settlement is one of the most popular programs offered within the debt relief industry. The biggest debt settlement companies in the country, National Debt Relief and Freedom Debt Relief offer these programs. Therefore for a consumer to have the best chance of negotiation with creditors, they must wait until their unsecured debts become delinquent. Many times this seems counterintuitive to the client but is necessary to gain leverage when negotiating a settlement.
Fair Debt Collections Act
In 1978 Congress enacted several consumer laws that protected Americans from “unscrupulous” debt collectors. These laws are under the umbrella of the Fair Debt Collections Practices Act or F.D.C.P.A. So for a consumer to have the best chance of negotiation with creditors, they must wait until their unsecured debts become delinquent. Many times this seems counterintuitive to the client but is necessary to gain leverage when negotiating a settlement.
A Negative Credit Score
Many “professionals” hype up the adverse effects going delinquent on your debts will have on the consumer's credit score. However, in my experience, if your searching for debt relief, your credit is already in bad shape. Therefore the risk of doing nothing far outweighs the benefits of a good debt relief program.
No Upfront Fees
Now Debt Settlement companies are not allowed to charge upfront fees so typically you will be making monthly payments to a “third-party.” They will hold your funds in a “savings or trust account” until they have built up enough equity to settle a debt. They typically start with the smaller debts first.
This process can take upwards of 3-4 years, depending on the debt amount owed. Any program over four years for most states should raise a red flag as this is usually the statute of limitations. There is no reason to pay an alleged debt that you are not obligated to under state law. Therefore a company charging you for extended periods over the S.O.L. is unethical and probably a "scam."
Most consumers do not realize that when their lender has “charged-off” their debt, it is no longer “actively owed,” meaning the original lender is no longer pursuing these debts. Unsecured debt, credit card debt, medical debts, personal loans, or even auto repossessions eventually get written off for tax purposes. Lenders may have insurance policies for debt defaults as well, but I imagine most take advantage of the tax benefits in balancing the books at the end of the year.
What happens with “debt” is a funny thing, as time goes on, it becomes a “debt chameleon” different things to different people depending on how much time has past and local state laws. Unfortunately, as most people know when you don’t pay your bills, a collection agency is assigned your debt. Again this is an interesting area that most, even in the debt relief industry, don’t fully understand.
What Happened To The Debt?
Many people in the debt relief industry believe that debts can not be legally sold; this is absolutely wrong. There are more than enough case law and court rulings to make that clear. However, here is where it gets interesting.
For a debt to be “assigned” to a different party, it must meet a certain standard of requirements under Federal law, Section 809 of the F.D.C.P.A. This may include the original contract, original signatures, accounting of interest, etc. This law passed in 1978. Since then, a tiny “niche” industry has developed to utilize this law and protect the consumer. The programs that are most effective in taking advantage of this law are called Debt Validation programs.
Most people don’t realize is that when the lender sells this “information” to the debt buyer. They usually include a stipulation that all required information is not guaranteed. If this isn’t enough of a “Red-Flag” to get a first-year law student an “aha” moment, I don’t know what will. The lenders will even require the debt collection companies to purchase additional information if they need supporting documentation.
This becomes a subtle but effective incentive for debt collectors to pass on clients that challenge their debts through the debt validation process. After all the entire goal of the debt collector is to maximize profits by purchasing a consumers debt for almost nothing. Any additional cost does not fit into a debt collectors business model.
This is a considerable incentive for collection agencies to skip "targets" who challenge the legal validity of a debt. At the same time, this doesn’t mean they have all the documentation required even to meet the standard of owning the alleged debts. Only that they are willing to sell additional information upon request.
Fifty Cents Plus Fee's?
Now, with the Debt Settlement Programs, it’s not about challenging the legality of your debt. It's how to settle your debt for the least possible amount. Debt Settlement companies will often promise a .50 cent on the dollar settlement, which is untrue. This may end up being the final settlement on your student loan or credit cards but there is no way for them to know ahead of the actual debt negotiations. Also, most settlement companies will charge 15-25% in fees on top of the settled debt amount.
Again there is no guarantee prior to the debt negotiations of what the lender or third party debt collector will be willing to settle for. So any sales calls giving you a "hard" number on the settlement amount is untrue and a indicator of the unethical practices of the salesmen. In addition some lenders have a policy against any type of settlement, so you as a consumer should be aware that there is no "easy out" when dealing with a settlement of your debt obligations.
Free Compound Interest Debt Calculator
When comparing the cost of compound interest over time vs., a debt settlement or debt validation program, the fees for services are far less than what you would owe otherwise. For a more accurate assessment of what your debt would cost check out this helpful
Alternative Debt Relief Programs
There are alternative programs available such as credit counseling, a debt management plan, or debt consolidation loans for paying off debt. However, typically, high-interest rates and poor credit scores make it difficult and unrealistic to utilize these options.
Last Shot At Settlement Via Lender
Credit card companies as a last desperate effort to recoup money from your outstanding balance will usually take a lump sum payment. This is offered directly before they charge off your debt. Ironically, this is after many previous attempts at coming to a reasonable payment plan, have failed. You may have to let them know you are filing for bankruptcy to get some type of settlement agreement.
Focus On Your Debt
Most people worry about how a debt settlement program will affect their credit. However, your debt to credit ratio is already affecting your score. The majority of people have poor or fair credit, so the impact of a legitimate debt relief program is negligible. Again, understanding your rights and being proactive in clearing up your debts should be your priority.
Let me also mention that the debt relief industry rightly so has a “tarnished” reputation. There is a lack of transparency and oversight of many companies within the industry. There will always be unethical people who take advantage of those who are in a position of weakness. However, I do believe when appropriately executed, debt relief programs can be highly effective. More times than not, people are in terribly difficult situations with no good debt advice or easy solutions.
Today It is easier than ever to research companies and practice necessary due diligence. The federal trade commission has a wealth of useful information as well as your local better business bureau. The Consumer Financial Protection Bureau, C.F.P.B. recommends contacting your state attorney general. Take advantage of these powerful resources and gain back your financial freedom today.
Better Business Bureau (B.B.B.)
Federal Trade Commission (F.T.C).
Consumer Financial Protection Bureau (C.F.P.B.).
State Attorney General (Your State)
I hope this article has given you a better understanding of how debt settlement works. When "Life-Happens" and you are forced into tough situations, knowing what to do can be difficult. This is why you need a professional advocate who will guide you back to financial freedom.
Revolution Debt Relief LLC