Three years ago, in
October 2010, the Federal Trade
Commission (FTC) implemented new rules regulating the debt relief industry. As
a result, many debt relief firms decided to exit the industry rather than
comply with the rules. However, Americans' debt load continues to be a problem,
and fuels demand for relief.
In August 2013, consumers carried $849 billion in revolving
debt (the category that includes credit cards). Although total household debt
in the U.S. has dropped 2 percent in the past year, it still stands at a
staggering $11.15 trillion when including non-revolving debt (such as student
loans) and mortgages. The average American who carries credit card debt owes
more than $15,185 on those credit cards.
The deeper Americans go into debt, the greater the need for
debt relief assistance. If you find yourself in very serious debt, here is what
you need to know about getting help.
What is debt settlement? Debt settlement firms, also known
as consumer credit advocates, negotiate lower total debt payments on loans owed to credit card
companies, medical offices or other creditors of unsecured debt (that is, debt
not backed by a tangible asset such as a house or car). These firms sometimes
are able to reduce debt load by almost half. You also may hear debt settlement
referred to as debt negotiation or debt resolution.
What are the benefits of debt settlement? The debt settlement process
can help you get out of debt in two to four years, faster than credit
counseling. Repayment terms are almost always better than filing for Chapter 13
bankruptcy. Although going through debt settlement generally will hurt credit
scores, the impact is not as severe as it would be with a bankruptcy filing.
Debt settlement generally will not remain on your credit profile for as long as
a bankruptcy filing.
What are the downsides of debt settlement? You do not make payments to
creditors while the debt settlement firm is negotiating new terms. Instead, you
must save up as much as possible. These savings will be set aside in a separate
bank account that you establish and control. Later, you will need to use these
funds to pay the settlements that the debt settlement provider has negotiated.
Lenders add on interest and fees when you miss payments. And missed payments
can have a significant negative impact on credit scores. In addition, there is
always a risk that your creditors will not accept a settlement offer. If this
happens, they could sue you for the amount you owe. That is why debt settlement
is only for people in very serious debt, who otherwise would need to consider
What do the FTC rulesmean? In
the past, debt settlement companies could charge consumers upfront fees
regardless of settlement results. The 2010 FTC rules included implementation of
the Advance Fee Ban, which requires debt relief companies to renegotiate,
settle or reduce the terms of a consumer's debt – and the consumer to agree to
the settlement – before collecting any fees. How do I find a reputable debt settlement firm? The
FTC changes have made it easier for consumers to find and work with trustworthy
companies. The American
Fair Credit Council
(AFCC) is a good place to start your search. The AFCC does not allow
membership to any firm that charges an advance fee. The
organization also enforces a code of conduct that is even stricter than those
of the FTC and many states. In addition to AFCC membership, it can be helpful
to look for a firm that requires counselors to receive certification from the International Association of Professional Debt
settlement may be a good option if you are struggling with very serious debt,
cannot make required minimum payments, and are already considering bankruptcy
or credit counseling. Before agreeing to work with a debt settlement firm,
satisfy yourself that the firm complies with the 2010
FTC rules – particularly the prohibition on charging advance fees. Ask as many questions as necessary to
ensure that you understand how the firm's process works, and look for a company
that has an established, long-term record of successfully getting
results for clients.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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