When you realize that you can hardly handle your debt and want to look for some professional aid to reduce your debt, you may start an online search. Unfortunately, you are likely to end up seeing many scams. At best, they take your money away without doing anything. At worst, ineffective or inappropriate debt negotiation can even worsen your credit profile and bring in negative and long term consequences for you ability to get credit in the future.
Stay away from scams
To protect yourself from debt reduction scams, you may want to check out this list of warning signs suggested by the Federal Trade Commission. Avoid any companies that do the following:
They promise that only a fraction of your unsecured debts need be paid off. Such promises are a good indicator of scam because there should be no such guarantee that your creditors will accept your partial repayment. In fact, you are encouraged to directly contact your creditor as soon as you realize that your debt is getting out of control.
They charge expensive service fees. Most debt relief or reduction companies charge substantial monthly fees and a final fee, which is often in a form of a percentage of what they are supposed to save for you. The charges may also include fees to establish an account with the negotiator.
They ask you to stop making payments or not to contact your creditors. Meanwhile, the company does not pay your creditors on your behalf until enough money has been accumulated to settle your debt. This results in an accumulation of accrued interest and late fees. What’s worse, your credit score will also get harmed when you skip payments.
They tell you that your creditors will not sue you for not paying unsecured debts. The truth is the opposite: not only can creditors sue you, but when they win the lawsuit, they can garner your income and property.
They tell you that they can remove negative information from your credit report. The truth is that it is illegal. Nobody can remove negative but accurate information from you credit report.
Metrics to pick a company, if you have to
The company should be able to save you at least 40% of your debt, taking both your payments to your credits and the service fees into account. Keep in mind that you can already save 20% on your own. So before you make any payment to the debt reduction company, you should demand a realistic estimate of total payment that not only includes the debt repayment, but also all service fees and charges in the contract you will sign with the company. Then you can compare how much they may save for you with how much you can save on your own. Keep in mind that the company may try to understate your total expenses.
The company should propose a realistic payment plan that is not longer than three years, preferably two years. The bottom line is that debt settlement is supposed to make you debt free within a relatively short period of time, like 2 or 3 years. However you need also be cautious when a company claims that it can reduce your debt “immediately”.
The company should have a fair reputation and you can check their rating on the Better Business Bureau (BBB). The rule of thumb is to search for companies that have existed for more than 10 years. If you intend to work out your negotiation with an aid from a law firm, you may want to check the state bar of the attorney. Attorneys that are members of the bar association are usually held to higher standards.
