Debt Settlement, Debt Negotiation or Debt Mediation is something that you can probably handle by yourself if you have a little knowledge. The first thing I would do is read the Fair Debt Collections Practices Act. If you have the stomach for dealing with nasty and abusive creditors hounding you all the time then I would say go for it. If not, then you may want to hire a third party debt negotiator to handle your old collection accounts.
How Does Debt Settlement Work?
Ethical credit card debt settlement and debt negotiation companies require, first and foremost, that you need to be in collections on your unsecured (credit card) debt. Generally if you have more than $5,000 and in many cases $10,000 in bad debt out there then you are a good candidate for a debt settlement company. If you have less than this, it is difficult for the settlement company to make any money. Also with less than $5,000 owed in collections you probably only owe 1 or 2 creditors and you should be able to handle that level of negotiation yourself. If you have enough debt to have a debt settlement company work with you, you will make monthly payments to them until your debt is paid off.
Is Debt Settlement Affordable?
The debt settlement company will take your whole amount of bad accounts added together and multiply that total figure by 60%. This is the amount that they will shoot for to settle your debt. They will divide this amount of money by either 36 or 60 months (3 to 5 year plan depending on how much you owe, who you owe it to and how much you can make in payments) which will give you your monthly payment. If you can make this payment then you’ll probably be able to use debt settlement to pay off your bills. Every debt collection company is different, so if you get turned down at one company you should look for another company to work with.
Will Collector Calls Continue While I am in the Program?
Since your accounts are already in collection or charge off status, you need not worry too much about waiting a little longer until your debts are paid off. Once you start a debt settlement program you will sign a limited power of attorney with the settlement company. The debt settlement company will use the power of attorney to send letters to your creditors and collection companies to let them know that you have hired the settlement company to settle your debt. More and more, debt settlement companies are either owned or run by attorneys – so in effect in many cases you will be hiring an attorney in working with a debt settlement company.
In these letters there will be a directive for the collection company to stop calling and harassing you and to start communicating with the settlement company as your representative. The nasty phone calls will pretty much stop immediately after you start the program. This alone is worth it to pay a professional company to settle your debts.
What Happens to The Money That I Pay the Debt Settlement Company
Additionally, when you start your debt settlement plan you will begin to make monthly payments to the company which they will deposit into a trust account. These amount of these payments will be based approximately on the formula that was presented earlier in the article. Most likely they will set you up on some sort of auto payment from your bank account so that you don’t “forget” to pay them. They will keep your money in their trust account until you have paid them enough money to pay off an account. Once you can pay off an account, the negotiator will get on the phone with the Collection Company or creditor and negotiate a reduced balance payoff. Once they pay off one account, the settlement company moves on to your next account.
The process continues until your debt is paid off. Paying off your debt is one thing, you will also need to make sure your credit report either gets fixed along the way or you will need to fix it when your settlement program is over. It is far better to make sure your credit report is fixed along the way. It takes time for your credit to rebound and you can use any head start you can get.
Written by Debt Free Dave. Debt Free Dave has been in the mortgage and consumer finance business for over 10 years and runs a blog at: debtnegotiationzone.blogspot.com. He has a Finance and Real Estate degree from the University of Arizona.
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