Non Profit Debt Solution
Non Profit Debt Solution
Debt settlement , also known as debt arbitration or debt negotiation , is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.
As long as consumers continue to make minimum monthly payments, creditors will not negotiate a reduced balance. However, when payments stop, balances continue to grow because of late fees and ongoing interest.
Consumers can arrange their own settlements by using advice found on web sites, hire a lawyer to act for them, or use debt settlement companies. Some settlement companies may charge a large fee up front; or take a monthly fee from customer bank accounts for their service, possibly reducing the incentive to settle with creditors quickly. One expert advises consumers to look for companies that charge only after a settlement is made, and charge about 20 percent of the amount by which the outstanding balance is reduced.
History
As a concept, lenders have been practicing debt settlement thousands of years. However, the business of debt settlement became prominent in America during the late 1980s and early 1990s when bank deregulation, which loosened consumer lending practices, followed by an economic recession placed consumers in financial hardships.
With charge-offs (debts written-off by banks) increasing, banks established debt settlement departments staffed with personnel who were authorized to negotiate with defaulted cardholders to reduce the outstanding balances in hopes to recover funds that would otherwise be lost if the cardholder filed for Chapter 7 bankruptcy. Typical settlements ranged between 25% and 65% of the outstanding balance.
Alongside the unprecedented spike in personal debt loads, there has been another rather significant (even if criminally under reported) change – the 2005 passage of legislation that dramatically worsened the chances for average Americans to claim Chapter 7 bankruptcy protection. As things stand, should anyone filing for bankruptcy fail to meet the Internal Revenue Service regulated ‘means test’, they would instead be shelved into the Chapter 13 debt restructuring plan. Essentially, Chapter 13 bankruptcies simply tell borrowers that they must pay back some or all of their debts to all unsecured lenders. Repayments under Chapter 13 can range from 1% to 100% of the amounts owed to unsecured creditors, based on the ability of the debtor to pay. Repayment periods are 3 years (for those who earn below the median income) or 5 years (for those above), under court mandated budgets that follow IRS guidelines, and the penalties for failure are more severe.
How it works
Essentially, the debt settlement company negotiates on the borrowers’ behalf with creditors to reduce the overall debts in exchange for an agreement upon regular payments to be made. Only unsecured debts, such as medical bills and credit card debts can be handled, not student loans, auto financing or mortgages. For the debtor, this makes obvious sense – they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering, sometimes by more than 50%, their debt balances. Whereas, for the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file bankruptcy (in which case, the creditor risks losing all monies owed).
There are obvious drawbacks – credit reports will show evidence of debt settlements and the associated FICO scores will be lowered as a result. However, if a "paid in full" letter is obtained from the creditor, the debtor's credit report should show no sign of a debt settlement. There’s always the possibility of lawsuit whenever debts lay unpaid. Though few creditors wish to push borrowers toward bankruptcy – and the potential of governmental protection against all debts. In addition, the specific debts of the borrowers themselves affect the success of negotiations. Tax liens and domestic judgments, for reasons that should be clear, remain unaffected by attempts at settlement. Student loans, even those not federally subsidized, have been granted special powers by recent legislation to attach bank accounts without possibility of Chapter 7 bankruptcy protection. Also, some individual creditors, including Discover Card, for example, tend to have an aggressive resistance against negotiations.
Debt Settlement Companies
In order to work with a debt settlement company, a consumer needs lump sum cash (best scenario), or build up enough funds over pre-determined period of time. Once enough funds are built up the negotiation process can begin with each creditor individually. Accounts can be held by credit card companies or may be sold to collections agency for average of $0.15 on the dollar. In which case debt can still be negotiated. The debt settlement company negotiates with the credit card companies for 35% - 50% of the existing balances. The debt settlement companies typically have built up a relationship during their normal business practices with the credit card companies and can come to a settlement agreement quicker and at a more favorable rate than a debtor acting on their own. Once the consumer pays the agreed upon amount, some debt settlement companies take a percentage of the savings of the forgiven debt as the fee. With the current economic crisis, more and more credit card companies may be willing to settle existing credit card debts rather add to their already large written off bad debt.
Because many debt settlement companies are for-profit and their employees are paid based on commissions, many frequently don't even contact the debtor until the account has charged-off. In many states this practice is considered unethical, and debt settlement companies are not allowed to practice in Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia nor Wyoming.
Debt Negotiation Companies
Also a type of debt settlement firm, they offer a consumer a different way to get out of debt. These companies work with consumers who have no cash to make settlement offers with the credit card companies. Debt Negotiation companies set up "trust" for you - though they are not always a licensed bank entity under the Federal Reserve. They collect a monthly fee to maintain the account, with the idea being that you are saving enough money to settle the accounts at a future date. A portion of the monthly payment towards the "savings account", while a part of the payment is taken as a fee for the debt negotiation company. Unlike consumer credit counseling services, they do not pay your creditors each month, they put money into your "trust". A legitimate company will use an FDIC insured company for the trust account and give you access to it online 24 hours per day. They should also provide you with access to the negotiation correspondence with the credit companies.
The drop out rate of consumers from debt negotiation companies is high. The debt negotiation companies do not handle calls from the credit card companies, nor the collection agencies. Credit card accounts typically go into collection after they are charged off, typically 180 days after the last payment on the account. The length of the program is often 3–5 years, and many consumers cannot keep up the payments for this period of time. Often, consumers wind up being sued or even more deeply in debt with added interest and fees piling up. This can be avoided by using companies with good standings and practices that protect consumers from these procedures.
Do-It-Yourself Debt Settlement
In general, only unsecured debt (not secured by real assets like homes or autos) can be settled for less than owed. Many people report success in negotiating a debt settlement for themselves . It's possible for a consumer to imitate the methods of professional debt settlement companies or debt negotiation companies successfully.
An individual can obtain a settlement agreement with an original creditor just like a professional debt settlement company can, and should not be afraid to try. Initiation of negotiations can begin merely by calling the customer service department of the credit card company. Timing is everything; in general, the credit card company will only deal with a consumer when the consumer is behind on payments. A successful settlement occurs when the credit card company agrees to take a percentage of total account balance. A payment plan is not an option; the credit card company will demand that the consumer make a lump sum payment of the settlement amount.
Negotiating with a collection agency or junk debt buyer is somewhat similar to negotiating with a credit card company. However, many collection agencies (or junk debt buyers) will agree to take less of the owed amount than the original creditor, because the junk debt buyer has purchased the debt for a fraction of the original balance. . As a part of the settlement, the consumer can request that collection is removed from the credit report, which is generally not the case with the original creditor. Even if the removal of the collection account from the consumer credit report has been successfully achieved as a condition of settlement during negotiations, the negative marks from the original credit card company will still remain, according to Maxine Sweet, a spokeswoman for credit reporting agency Experian.
Do-It-Yourself Debt Settlement is a much cheaper option than hiring a professional organization, and in many cases can be more effective, since the consumer is much more vested in the process than an impartial t
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