Debt Settlement Companies: What do They do?
If you are struggling to figure out how to handle your debt, chances are, you are resorting to the many different debt relief programs. In the financial industry, there are many different options and tools available for consumers just like you. The reality is, no one wants to live with outstanding debt. Having creditors call you or send constant envelops in the mail can be incredibly nerve-wracking or frustrating.
With that being said, one financial tool that many people have opted-into is debt settlement. Through the years, given the vast amount of settlement companies, this industry has received quite a negative connotation, some of which we are going to explore today.
In this article, we are going explore debt settlement companies and whether debt settlement is a good choice for you. Furthermore, we will even share our guide of 10 pertinent questions to ask debt settlement companies to ensure you are in the right place and signing the right contract.
What is Debt Settlement?
Debt settlement is a unique debt relief programs that seeks to help eliminate a chunk of debt that a consumer owes. Simply, debt settlement is the process of negotiating with creditors to minimize the total amount of debt owed. Now, it’s not as simple as it may sound. In order to do this, consumers must partner with debt settlement companies, who will end up doing the negotiating for the consumer.
Furthermore, with debt settlement, consumers will no longer pay their monthly bill to their creditor, but instead the debt settlement company. From there, the settlement company will hold the money during the transition process. Typically, creditors will quickly learn that the consumer can no longer make monthly payments under the original terms and conditions. Keep in mind, debt settlement can be incredibly risky as creditors can send consumer’s accounts over to collections and even sue the consumer for violating the contract. With that being said, it’s vital to truly gauge whether debt settlement is best for you.
Is Debt Settlement Best for You?
In the financial industry, there are many different debt relief programs, all designed to help handle, manage, organize, and eliminate your debt. However, given the different types of programs, it can be difficult to figure out whether debt settlement is best for you. With this being said, before we share our guide to picking the best debt settlement company, we are going to quickly cover the different types of programs that exist today:
Debt consolidation is a debt relief program where individuals may take all of their debt of their choice and consolidate it under one loan. Instead of having to pay several monthly bills, with debt consolidation, consumers can merge all their monthly payments into one single bill. This is typically best for individuals with better than average credit. Read more about how to get rid of debt or use a debt consolidation calculator to see if this is a good fit.
As we mentioned earlier, debt settlement is a financial tactic of negotiating the total debt you owe to a creditor. The goal of this is to lower your total debt owed. To do this an individual will use a debt settlement company, who should help with the entire process. This option is best for individuals who have lower credit and struggling to make monthly payments.
The last debt relief program that we will discuss is debt management. This is where individuals will seek professional help from financial counseling companies that can help craft intelligent budgeting plans to eliminate your debt. Like debt settlement, these programs are best for individuals with bad credit.
When it comes to any of these debt relief programs, it’s highly advised from financial gurus to stay away from including any secured debt into these programs. In other words, you should never try to bring your mortgage or home loan into this picture. If you happen to make this mistake, you are placing your home at a serious risk. Debt relief programs like debt settlement should only be used for unsecured debt, like credit cards or medical bills.
10 Questions to Ask Debt Settlement Companies
In the debt settlement industry, there are dozens of different debt settlement companies. While this is great to have options, it’s important to do proper research and evaluate each company to pick out the best debt settlement company for you. Given the risky nature of this industry, we have jumped in to better help you pick out the best possible debt settlement company.
We have created a guide of the 10 most pertinent questions all debt settlement companies should answer – prior to even signing any contracts. With that being said, on your journey be sure to ask each company the following questions.
- What type of Debt Settlement Company are you?
For those who are new to debt settlement, you might be confused by the first question. The goal with the first question is to weed out debt settlement companies that are considered: attorney-based debt settlement companies. Reason being, these companies are not beneficial for consumers as they charge upfront fees and can prolong eliminating your debt. In our opinion, consumers to stay away from these types of companies as they tend to be more money hungry and feed off individual consumer fear that creditors may in fact sue them. Since debt settlement is such a risky decision, we highly suggest finding a genuine and honest company that is not after money, but to help you.
- What are your accreditations?
One of the most important questions that consumers can ask debt settlement companies is for their accreditations. Given the competitive nature of this industry, consumers should make sure that each debt settlement company on their list of possibilities are accredited by the Better Business Bureau. With this website and company, consumers can learn a wealth about a company, including complaints, accreditations, and reputation in the industry. If you are new to the financial industry, you will find BBB a very handy tool. If a company can not shine any light on their accreditation or they tend to avoid the question, avoid that company at all costs. Typically, debt settlement companies are proud of their accreditations.
- Will you be charging any fee prior to settling debt?
This is one of the first questions you should ask any debt settlement company. Reason being, if a company is charging any upfront fees prior to settling any debt, you should immediately eliminate them from your list of options. In 2010, the Federal Trade Commission enacted a law stating that it was innately illegal to do such an action. In other words, debt settlement companies have no right to charge any fees until after settlement has taken place. Any company that tries to bypass this law is money hungry.
- How long as your company been in the debt settlement industry?
This is a typical question that all consumers should ask any business before making a major financial decision or purchase. When it comes to debt settlement, since there are so many different debt settlement companies, inquire about how long each company has been in the industry, what their experience is and their expertise. This could shine some light as to their reputation. In our opinion, since debt settlement is quite serious, selecting a younger company is a riskier decision than debt settlement itself. Look for companies that are established and offer more for you.
- How does a consumer know you are truthful?
If you want to put a debt settlement representative on the spot, ask them how a consumer would know if they are telling the truth. Reason being, in this industry, so many debt settlement companies are so quick to the tongue and pouting out false facts and statements, merely to grab consumers’ attentions. With that being said, ask debt settlement companies for physical and written proof of their statements. This will help weed out dishonest companies, which should be avoided at all costs.
- How much debt have you settled for other consumers?
As you learn more about a company’s reputation and experience in the industry, take the time to inquire about how much total debt they have settled for other consumers. Typically, debt settlement companies should be open to discuss this answer; however, again, be sure to ask for proof of their statistics and numbers. Hint: you might be able to find this information available on their website. If you can, compare the companies answers with their website. This is always a good tracking measure.
- Can a consumer get sued from creditors?
Many of these questions are designed to help highlight honest and genuine companies. The truth of this question is that consumers can always still get sued from creditors when utilizing debt settlement. The reason behind this is that when a consumer utilizes any debt relief program, they are at risk of violating the original contract. So, creditors then have the option to work with the consumer, send the account to collections, or even sue. In light of this, if a debt settlement company says anything otherwise – we highly suggest removing the company from your list. This is a giant risk that all consumers should be aware of before signing any contract. Typically, companies that promise that a consumer will not get sued is a mere marketing technique and potentially even a scam.
- Will debt settlement positively impact one’s credit score?
This is another vital question to ask debt settlement companies. Most likely, the companies will tout how debt settlement will positively impact your credit; however, only a few will be honest to share that debt settlement can, and might even, negatively impact your credit score as well. Whenever you enroll in any form of debt help, your credit will be negatively impacted. However, through eliminating debt from your record and making monthly payment, your credit score should recover.
- How long will debt settlement take?
Sadly, debt settlement companies will make false promises in order to land their next lead or consumer. With that being said, it’s important that you take the time to ask the company specifically how long the debt settlement will take. In other words, how long, from the very moment you sign the contract, will the entire process take until all debt is paid off. Now, there are many different variables that will impact the term length; however, the company should be able to provide proof as to how long it will take to pay off all debt given the current circumstances. Use a debt calculator to estimate how long this will take. Do keep in mind, most of this information is considered an “estimate” because of the volatile nature of the debt settlement.
- Where will my monthly payments be held?
Since debt settlement companies take your money and put them on hold each month, it’s worth asking where they will be stashing the cash. Typically, a well-respected company will utilize a third-party, not themselves. In this, you should look to see if they utilize a company approved by the Federal Deposit Insurance Corporation, or FDIC. Companies should be open and disclose their company of choice. We do suggest taking the time to even extend your research to learning about the third-party to ensure you money is in good hands. If any debt settlement companies promise to hold your money in their own accounts, avoid them at all costs.
Researching Debt Settlement Companies
Aside from asking debt settlement companies questions, one of the best things that consumers can do to ensure the best possible deal is through doing proper research. By researching debt settlement companies, you can learn more specifics about the company and even see what previous consumers have said about their experience. This may even prove useful when question debt settlement companies!
At the end of the day, debt settlement can be a risky endeavor if not handled properly. Be sure to take the time to ask questions, do research, and compare estimates with other companies. Don’t ever feel like any of your questions may be silly either; you will be grateful in the long-run knowing you asked all your questions.
Carl has years of experience helping people tackle debt. As a Senior Financial Advisor, he knows the ins and outs of debt consolidation and debt management. He holds a Masters Degree in Finance and according to him, not all debt problems are the same and that’s why it’s important to take a look at the different options available for your situation.