| Debt negotiators can crush your credit |
| By Lucy Lazarony
• Bankrate.com |
| Stressed out and looking for relief
from high credit card bills? Beware of companies that promise
to cut your bills in half by negotiating lower payoff amounts from creditors.
Sign on with a debt negotiator or debt-settlement
company and your credit rating and your wallet could take some serious hits. If
high fees and trashed credit aren't bad enough, you may also owe taxes on any
debt that gets wiped away.
Beware winding up in even worse
financial shape
"Be very, very careful because there can be substantially more
harm than good," says Paul Richard, executive director of the
Institute of Consumer Financial Education in San Diego.
"It's the fees, the possible liability to the
IRS after you get this negotiated and they're not doing anything
for you that you can't do yourself. These slick debt negotiators,
they smooth talk people around all these issues. They're really
taking advantage of people."
Fees,
fees, fees
Let's start by taking a closer look at the fees. Some debt
negotiators charge hefty upfront fees. Others charge fees based on the amount
of debt you owe or the number of credit accounts you have. Many also charge fees
based on the amount of debt a creditor agrees to wipe away. "There
are all these hidden charges going on," says Daniel Benson, a senior consumer
attorney at the Legal Aid Society of San Diego. Let's say
a creditor agrees to settle for $4,000 of the $5,000 you owe. You've saved $1,000,
but a debt negotiator will want a big cut, often 20 to 35 percent, for themselves.
That's not much of a deal, especially when you toss in the other fees that you
have to pay. One of Benson's clients learned that lesson the
hard way. She's 82, single and had $2,128.81 of debt she wanted to settle with
the help of a debt negotiator. The company charged her an initial application
fee of $250 and an initial legal processing charge of $1,345. That's $1,595 in
fees right off the bat for help with just over $2,100 in debt. Talk
about a lousy deal. The hit to your
credit rating
Sky-high fees are only part of the problem when you do
business with a debt negotiator. Your credit takes just as much of a hit as your
wallet. Here's why. Often, a debt-negotiating company will
tell you to stop making payments to creditors and to send money to them instead.
The money gets placed in an account until the debt negotiator decides to make
an offer to a credit card company.
And that could take a while, especially if you pay
a negotiator through monthly payments rather than forking over a
large sum upfront.
It could be several months before
a debt negotiator has collected enough money from you to make a settlement offer
to a creditor. And after several months of not paying your
creditors, your credit will be trashed. "They tell you
to stop talking to creditors, which is a bad idea," says Dianne Wilkman,
president of Springboard,
a nonprofit consumer credit management organization in Riverside, Calif. "Your
creditor will charge off your account and that will ruin your credit."
Creditors typically write off, or charge off, a debt
if there has been no payment on the account for more than 180 days
or six months. A charge-off will remain on your credit report for
seven years plus 180 days from the date of the first nonpayment,
according to the Fair Credit Reporting Act.
"A charge-off is the biggest negative red flag
on your credit report," Richard says. "It means a lender
lost money doing business with you."
So
even if a debt negotiator is able to lower a credit card balance as promised,
you could be stuck with a dismal credit record for more than seven years.
Here's another thing to worry about: If a creditor
refuses the settlement amount offered by a debt negotiator, you
could be sued.
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