Nine Questions to Ask a Debt Negotiation Company

16 Feb Nine Questions to Ask a Debt Negotiation Company

Settling your debts through negotiation sounds like a good idea short of bankruptcy. It rarely works out that way if you have a lot of debt compared to your current income.

Most debt negotiators operate on a specific idea: You will save up the money to make a settlement offer to each lender in turn until the debts are gone. It’s an alternative to a debt management plan, offered by more traditional credit counselors, which pays your debts back in full over time with reduced interest rates and each creditor gets some money each month.

Debt settlement or debt negotiation sounds like it should save you some money and time. And maybe avoid bankruptcy.

But here are nine questions you should ask a company offering to negotiate your debts for you.

1. Will they stop the interest from accruing on your debt? Or the late and overlimit fees?

Most debt settlement services deal with folks who really want to pay their debt back but can no longer keep up with the accumulating interest and fees. If they can’t stop those charges, then they hope you can’t do simple math.

For example, if you are behind on $20,000 of credit card debt, the lenders may in fact be willing to accept $12,000 to settle. But if no one stops the interest and fees accruing and it takes three years to save the $12,000 (plus the negotiator’s fees), then the balance owed could be $40,000. Will they still take only $12,000 to settle? Probably not. Now they want at least $20,000. Did your situation improve at all?

Don’t let hope cloud your judgment.

2. Will they stop lawsuits?

If you don’t pay a credit card back for a couple years, the bank gets cranky. Banks show their unhappiness by suing you. It will be hard to save up the money to negotiate settlements with all your creditors if one of them is not cooperating and instead garnishes your paycheck, bank account, and/or slaps a lien on some of your property.

This is a problem with making creditors wait to be paid without the force of law behind you. They don’t want to cooperate and don’t have to.

3. Do they have a local lawyer to help you? Can you see him?

Debt negotiation is sometimes regulated by state law. Many states provide that those regulations do not apply to a licensed attorney (since attorneys are separately regulated by the bar). Some debt negotiation firms will be run as law firms in other states with affiliated lawyers in your state, in order to try to get around these requirements.

If they claim to have a licensed attorney who can work on your case, you ought to be able to talk to her. After all, the implication is that she is your lawyer. It would surprise me if that was OK with the debt negotiation company. In some cases, it may come as a surprise to the lawyer that their name is being used in these offers.

4. Will they let you hold the money in your regular bank until a deal is worked out?

While you are saving up the funds to make settlement offers to your creditors, someone has to hold the money. The debt negotiator will normally want the money put on deposit with them directly (in something that sounds like a trust or escrow account but may only be an entry in their books) or on deposit with an affiliated bank which doesn’t send you statements, give you checks, or make it easy for you to withdraw the money except with the help of the negotiator.

If it is really your money, you should be able to hold onto it until a deal is worked out. If you can’t, why not? There’s no answer to that question which should make you happy if you think about it hard enough.

5. Will they take their fee only when each settlement is made or does it have to be upfront? Will they refund their fee if the overall plan doesn’t work?

Most debt settlement programs I have reviewed have the payment schedule set up so that the negotiator gets paid first. The first several months of payments into the account are taken immediately by the company. This will be several thousand dollars in many cases. Usually the contract terms make this fee non-refundable.

Normally debt negotiators work from smallest-to-largest accounts. They settle the little ones because they’re easy. You put aside $500 and the $1,000 store credit card you had goes away. See how easy it was? But as in real life, the largest bills will be the hardest targets to meet — and they will accrue interest much faster than the little ones do. So their fees ought to be paid based on the amount of benefit they actually get you as they go along.

6. Will they remove the arbitration clause and class action waiver from their contract?

Most debt negotiation companies include a clause in their long contracts that requires you to arbitrate any dispute with them, and waive the right to pursue a class action. This means you can’t sue them and you can’t join or start a class action against them. Arbitration is private, not governed by court rules, and generally favorable to the non-consumer party who pays the bills for most arbitrators.

If they insist on an arbitration and class action waiver, ask yourself: They can’t stop the lawsuit against me but they won’t let me sue them if they don’t do what they promised, why is this good for me?

7. Do they carry insurance or a bond which protects you if they make your situation worse?

Consumer lawyers often carry malpractice insurance. We do so to protect ourselves in case we get sued, of course. But we also do so to protect our clients if we make a serious mistake.

If they don’t have anything that protects you from their mistakes, are you sure you want to hand your financial future over to them?

8. Will I have to pay taxes on any of the settlements?

Forgiven debt can be taxable income to you. That means you may get a 1099C from the bank next year after a settlement is made. Unless you convince the IRS not to count this as income under the tax laws, then you will owe tax on the “phantom income.”

Debt negotiators will sometimes mention this in the fine print of their contracts and in their marketing materials. But it’s passed over as though it is nothing of importance and a rare problem.

When was the last time you thought of having the IRS on your back as a “small” problem?

9. Will they put it in writing?

Often the customer service folks at debt negotiation companies are extremely nice. And helpful. Most salesmen are.

But if the debt negotiator answered many of these questions to your satisfaction, ask them if they’ll put that on the company’s letterhead and add it to their contract with you. Usually that is a problem for all sorts of reasons.

When a person trying to convince you something sounds great, they’re willing to work with you and answer your concerns but they don’t want those answers in writing, you have to ask why?

Bankruptcy lawyers can usually answer most or all of these questions positively. We understand it may feel wrong sometimes. But it isn’t unusual for us to talk with folks who have been made poorer by debt settlement companies and yet have no less debt. And their legal situation has gotten much worse. Sometimes the hardest choice is the right choice.

For further information, please read: Debt Settlement Plans Examined

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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