If you’ve ever been drowned in credit card debt, chances are a debt settlement company has contacted you. Even if you are not engaged in a conspicuous consumer activity, a setback such as a job loss, a need for medical services, or an automobile emergency could easily lead to a build-up of credit card debt.
Debt settlement companies seem to have a nose for who has accumulated credit card debt to offer their services. Before you even wonder if their services could be effective, you might need to consider whether you should pay them an upfront fee.
What Can A Debt Settlement Company Do For You?
Debt settlement companies are companies that will negotiate with your creditor to “settle” your debt for you. Typically, they’ll say they can help you reduce your debt to pennies for every dollar you owe.
On your end, you will likely need to set aside a monthly amount in an escrow account until enough money accumulates for the debt settlement company to repay your creditor. They may even tell you to stop making payments to your card issuers or to stop communicating directly with them.
Upfront charges are prohibited
A warning sign to watch out for is if a debt settlement company asks you to pay an upfront fee. The telemarketing sales rule, which dates back to 1995, covers calls that these companies make to potential customers, either on their own or through a third party.
The Federal Trade Commission changed the rule in 2010 so that it also applies to inbound calls that debt settlement companies, or their representatives, receive from potential customers.
This rule defines the type of information that a debt settlement company should provide to potential clients. It specifically prohibits these companies from charging upfront fees until they have successfully settled any debt on your behalf. They must ensure that they meet the following conditions:
They should have paid off at least one of your debts
You must agree to the terms of any debt settlement with your creditors. Although the agreement with the creditor must be in writing, you can accept the terms orally. The debt settlement company cannot get you to pre-approve any settlement they might negotiate in the future.
You should have made at least one payment to the creditor, or debt collector, based on the settlement the business has made with them.
If you have credit card debt with more than one issuer and the debt settlement service settles one for you, it can only charge a fee that is proportional to the debt it has settled.
For example, if you each owe $ 2,000 to three different issuers and the debt settlement company’s fees total $ 1,000, they can only charge you $ 333.30 after you settle your debt. from one of the issuers, or one-third of the total fee to settle one-third of your debt.
If you allow the company to charge you a percentage of the amount of money they saved you on debt, they should charge the same percentage for each debt they pay off.
For example, in the example above, if the company charges you for 30% of the debt settled and negotiates your payment up to $ 1,500 with one of the issuers, they may charge you 30% of the $ 500 that is paid. ‘she saved you $ 150. And he should charge you the same basic percentage for every debt he settles afterwards.
Debt settlement companies should also tell you in advance how long it will take them to successfully negotiate your debt reduction, how much it will cost you, any negative fallout (for your credit report, for example) and information about any accounts you may need to set up to tackle the problem. They are also prohibited from making false statements.
Debt Settlement Firms May Use Workarounds
In an attempt to circumvent the FTC’s ban on upfront fees, it appears debt settlement firms have resorted to workarounds. They can affiliate with lawyers to whom the prohibition on upfront costs does not apply, for example. You might think that you are hiring the services of a lawyer to take care of your debt, but you are not and they are only serving as a front for the debt settlement business.
Lawyers are also generally exempt from state laws governing debt settlement companies. It appears, however, that various states have become familiar with this type of front and are taking legal action against such companies, according to the Center for Responsible Lending.
It appears that debt settlement companies might even try to lure potential clients into their offices for a face to face meeting so that they are not covered by the telemarketing rule. Another tactic is to use the internet to find customers, although any resulting phone conversation would subject those interactions to the rule.
The bottom line
If you are considering using the services of a debt settlement company, be aware that they may not charge you an upfront fee. You may find that you can negotiate with your creditor yourself or go through an accredited credit counseling company who could even help you put together a debt management plan.
You can also consolidate all of your debts into a lower interest rate loan and pay it off slowly. Another option is to purchase a credit card with balance transfer, depending on how much you owe and whether you may qualify. If you avoid paying your debts, there will be consequences on your credit score.
Contact me at [email protected] with your credit card questions.