|How debt negotiators can crush your
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.
It's easy to wind up in worse financial shape than when you started.
"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
"There are all these hidden charges going on," says Daniel
Benson, a senior consumer attorney at the Legal Aid Society of San
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
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
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 awhile, 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 company 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.