How A Debt Settlement Company
Works To Settle Your Debts For Less
In general, a debt settlement company negotiates on behalf of the borrower with each creditor placed in the program to settle the overall debt in exchange for an agreed upon settlement payment to be made by a specific date. Typically, only credit card debt and other unsecured debts are negotiated, for example, mortgages, student loans, and usually auto loans, cannot be placed in the program.
For the debtor, this makes obvious sense — they avoid the stigma and intrusive court-mandated controls of bankruptcy while paying off their debt balance, sometimes by more than 50% of what was owed. As for the creditor, while taking a loss, it receives a partial amount of what is owed, but avoids further expenses that might otherwise be incurred through collection efforts and also the chance of the debtor eventually filing for bankruptcy — in which case, the creditor risks losing all monies owed.
There are obvious drawbacks — credit reports may show evidence of debt settlements and the associated FICO scores may be lowered as a result. There’s always the possibility of lawsuit whenever debts go unpaid and this may occur if the parties are not able to reach an agreed settlement amount and the creditor believes a lawsuit would result favorably on their behalf. This being said, however, although a creditor might receive a judgment, the creditor is not guaranteed that the debtor will ever have the ability to pay off the judgment amount.
To speak with a certified debt professional, we strongly suggest that you call 1800 DEBT.COM (that's 1800-332-8266) for a FREE debt consultation. There is absolutely no obligation, the conversation is completely confidential and the debt professional can answer all of your questions and, if so desired, can help place you in a program that meets your needs and resolve your financial troubles.
Debt Settlement Companies
In order to work with a debt settlement company, the debtor needs up-front cash, or alternatively have the ability to build up enough funds over a pre-determined period of time. Once sufficient funds are built up to settle one of the debts, the negotiation process can begin. In the meantime, the debtor continues to save funds, typically in a special account, to settle another debt, until all accounts placed in the program have been settled.
The negotiator may have to dealt directly with the original creditor, or a third party collections agency. In many cases accounts are sold to collections agencies, typically for $0.25 to $0.15 on the dollar, and in some cases even lower.
The debt settlement company typically negotiates with the creditor or collections agency for 35% - 50% of the existing balances. In many cases, debt settlement companies have built up a relationship during their normal business practices with various creditors or collections agencies and can come to a settlement agreement quickly. Once the debtor pays the agreed upon amount, the debt settlement companies take a percentage of the savings of the forgiven debt as the fee. With the current economic crisis, more and more creditors are willing to settle existing debts rather than to add to their already large written off bad debt.
Unlike Consumer Credit Counseling Services (CCCS), debt settlement companies do not pay the debtor's creditors each month. Instead, the funds saved by the debtor are put into the debtor's trust account.. The creditors may not be told of the "arrangements" with the debt settlement company. A legitimate company will use an FDIC insured company for the trust account and give the debtor access to it online 24 hours per day. They should also provide the debtor with access to the negotiation correspondence with the credit companies.
The debt settlement company may or may not handle calls from the creditors, or the collection agencies. Credit card accounts typically go into collection after they are charged off, typically 180 days after the last payment on the account. The length of the program is often 1-5 years. Unfortunately, in some cases, debtors wind up being sued or in debt even more deeply with added interest and fees piling up. This can be avoided by using professional debt settlement companies that take appropriate steps to protect consumers from these procedures.
Creditor’s Incentives
The creditor’s primary incentive is to recover funds that would otherwise be lost if the debtor filed for bankruptcy. The other key incentive is that the creditor can often recover more funds than through other collection methods. Collection agencies and collection attorneys charge commissions as high as 40% on recovered funds. Bad debt purchasers buy portfolios of delinquent debts from creditors who give up on internal collection efforts and these bad debt purchasers pay between 5 and 25 cents on the dollar, depending on the age of the debt, with the oldest debts the cheapest. Collection calls and lawsuits often push debtors into bankruptcy, in which case the creditor often recovers nothing!
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