Credit Cards » Credit Card News » How Do Debt Settlement Plans Work
Date June 27, 2009

How Do Debt Settlement Plans Work

If you have ever come across offers for debt settlement, you are probably very curious about these offers and would like to know if their promises will actually work. You might even be considering signing up for one at this very moment. Well, before you do anything, first read up on how debt settlement plan works so that you’ll know the risks you are getting into and if it is worth the rewards.

How Do Debt Settlement Plans WorkDebt settlement companies are becoming more and more common nowadays. Taking advantage of the panicked feeling of many American consumers faced with enormous debts and no way out, debt settlement companies are becoming major players in the credit industry.

Debt settlement companies primarily rely on two things, the desperation of both debtors and creditors. Debtors are obviously desperate to get out of debt as quickly as possible. Creditors are also desperate because many debtors are defaulting on their debts and write offs are on the rise. Write offs are written as losses in the books of creditors, something they want to avoid so badly that they will negotiate for payments 50% or lesser than the original debt owed to them.

When you sign up for a debt settlement deal, you might be surprised by the fact that the first thing that they will tell you to do is to stop paying your bills. You are instead told to deposit your monthly payments to an account maintained by the debt settlement company. Also, the debt settlement company will ask you for a sizable upfront payment as well. They will also get a percentage of your debt as payment for their services later on.

When you stop paying your bills, you will get late fees, an increase in your interest rate and penalties, depending on your credit card. At this stage, there is no agreement between your debt settlement company and your creditor yet. When the credit company finds out that you are not paying your bills, they will now have the option to bring a lawsuit against you which will endanger your properties, if you have any or wages, if you are employed.

As you continue not paying your debts, your debt settlement company will then try to negotiate with your creditor to accept a payment of a lesser amount than the original debt to have your debts forgiven. Most companies aim for 35% of the original debt. If the creditor agrees to the settlement, then your debt is forgiven. However, your credit report will be marked with “settled for less than full amount” which will have a large negative impact on it.

As attractive as debt settlement offers are, there are clearly very serious risks involved. While you may have your debt forgiven for a percentage of its original amount, you will end up ruining your credit report. If you are employed or you own your home, you might be putting these in jeopardy as well. So think hard and consider all consequences before making the jump to a debt settlement program.

Date June 26, 2009

Debt Settlement, A Two Edged Blade

Understandably, American consumers are now scrambling for every available means of maintaining their finances. A large debt is a huge drain on the monthly income and is therefore something which should be settled as quickly as possible. Skipping on debt payment is an option and, indeed many consumers carrying debts too big to handle are opting for it. However, in the long run, it is a disastrous solution. The best way to get rid of debt is to pay it off. The problem is that, in the current economy, paying off debts can drain away all of a month’s pay.

Debt Settlement, A Two Edged BladeThis is why debt settlement is a fast becoming popular way of getting out of debt. The popularity of debt settlement is caused in a big way by the high growth of debt settlement companies. Debt settlement companies are financial entities which try to entice debt laden credit card holders by promising to settle their debts for a fraction of the original amount. These companies often make it sound as if debt settlement is an easy and safe way to settle your debts. Unfortunately, nothing could be further from the truth.

Debt settlement is a risky affair. If you use a debt settlement company, there is a large probability that you will get worse off than you were originally. Debt settlement companies also offer a service which you can very well do on your own without having to pay large fees.

While debt settlement companies are risky, debt settlement itself is also something that no one should take lightly. True, because of the economic crisis, credit card companies are more than willing to settle for a lower amount in order to forgive a debt. However, when a credit card company does this, they are likely to stop trusting you as a borrower.

The biggest blow that you’ll get when you go for a debt settlement is in your credit score. Your credit score shows how good of a borrower you are. When you get loans, your credit score is usually the first thing that a creditor will check. A low credit score will lower your chances of getting the loan approved. This is why the effect of a debt settlement agreement can be very dangerous for you. Debt settlement will put a black mark on your credit score which will stay there for seven years. It will have a huge negative effect on your score so that you will find it difficult to secure a loan in the future.

To avoid ruining your credit score, review every available solution first before you settle on debt settlement. There are many credit counseling groups which can help you do this. It is important to inform yourself first before you make a decision.

Date June 14, 2009

How Debt Settlement Program Can Work For You

If you are in the midst of heavy debt and you’ve looked around for a solution to your problem, no doubt you’ve come across debt settlement offers and are curious as to what they are. Here are a few things that you need to know about debt settlement programs.

How Debt Settlement Program Can Work For YouDebt settlement companies work as a kind of “middle man” between you and your credit lender. They will try to resolve your debt problems by negotiating with your creditors to see if they can lessen the debt that you owe. Debt settlement companies are mostly known for dealing with credit card debt settlement but they also handle other types of debt.

When you are dealing with a debt settlement company, they will usually require a “lump sum” from you to be able to negotiate with your creditors. In the best case scenario where you have an adequate “lump” amount, negotiations can then proceed. However, if you don’t, the company will ask you to stop paying your credit company and pay them instead. Your payments will then be deposited to your account in the accompany and, once it reaches a certain amount, the debt settlement company will then negotiate with your creditor.

Usually, a debt settlement company already has an ongoing relationship with your creditor. Thus, you can expect for the negotiations ot move quickly. The debt settlement company will offer for a percentage of your fees to be “forgiven” in exchange for a payment of your lump amount. Depending on the lending company and the lump sum amount, the lender may be willing to settle as they don’t really want your continuing debt to add up to their already big debt write offs.

Debt settlement companies usually charge upfront for their services. Furthermore, they may charge anywhere from 25% to 35% of your debt balance based on the amount you owe, the amount you can save through debt settlement and the number of accounts that you have debts on.

The amount of time it takes for debt settlement to remove all your debts and make you debt free depend largely your debts and on your lending company. However, most debt settlement companies can settle debts anywhere from 2 to 4 years.

With the current economic crisis going, you really should do your best to lower or remove your debts. In this regard, debt settlement companies can be quite helpful. Just make sure that you are aware of the legality of your debt settlement company and always insist that, whatever agreement you enter into, there is a written and duly signed document to back it up.

Date May 31, 2009

Debt Settlement Programs are Hurting Rather than Helping

The credit card problem has reached an all time high and many cardholders are currently delinquent in their bill payments.

Debt Settlement Programs are Hurting Rather than HelpingThe figures get much worse when considering the current unemployment rate in the U.S, which is, according to Fitch Ratings, at 8.9%. It is the highest unemployment rate of the country since 1983. With little in the way of available cash, consumers are turning to credit cards. Unfortunately, many are not keeping up with their bills and the credit card crisis just gets worse and worse.

Most consumers mired in credit card debt would like to get out of it as quickly as possible. Inevitably, some are caught in the latest of scams to hit consumers, the debt settlement companies.

Debt settlement companies are not scams per se. However, a large number of companies are taking advantage of the desperation among credit cardholders so that those legit companies end up getting bad press as well. These unscrupulous debt settlement companies often charge high amounts, take advantage of people’s ignorance of credit card practices, and ultimately end up increasing the debtors’ debts rather than lowering them. The debtor’s credit score is also inevitably affected negatively by the debt settlement company’s actions.

The unscrupulous actions of debt settlement companies are not going unnoticed. There have been some media coverage about debt settlement companies that scammed their customers and Andre Cuomo, Attorney General of New York, launched a national investigation on debt settlement companies. He has also had two credit card companies sued for false advertising and fraud. Lisa Madigan, Attorney General of Illinois, has also had some debt settlement companies sued, alleging that the companies “do little or nothing to improve consumers’ financial standings” and “engage in deceptive marketing practices”. In Texas, Greg Abbott, Attorney General, filed a lawsuit in March against a debt settlement company, alleging that the company was involved in “deceptive and misleading acts”.

Legislative director of Association of Settlement Companies, Wesley Young says that estimates place the number of debt settlement company customers at around 500,000 spread across around 1,000 companies. This makes for a huge market for debt settlement companies and Young’s group is trying its best to maintain the credibility of the debt settlement industry. Their association requires total disclosure of credit score risks and payment plans from members upfront.

Lobbyists for the debt settlement industry are also pushing for legislation for the regulation of the industry. However, it will be some time before these actually have some effect. Meanwhile, credit cardholders are learning about the high risk of debt settlement companies and are avoiding them. Some have even gone as far as avoiding credit card use altogether.