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6 debt negotiation myths

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By Andrew Housser

If you have significant credit card debt, and are struggling to pay it off, you may have considered getting help from a debt negotiation firm. Debt negotiation can offer tremendous help in certain situations, but many myths exist about the process and the companies that offer this service. Understanding the realities can help you make an informed decision.

Companies that offer assistance with debt negotiation – also called debt settlement – negotiate with credit card companies, medical offices and or other creditors of unsecured debt. (Unsecured debt is debt that is not backed by a tangible asset, such as a vehicle or house). They work solely on a consumer’s behalf to reduce the debt obligation. When they succeed, the creditors agree that a consumer will pay a lower amount instead of the full total.

Debt negotiation can help a consumer get out of debt in 24 to 48 months. It can reduce debt load by as much as 50 percent (not including fees). The process generally is faster and less expensive than credit counseling, and usually requires a lower minimum payment. Repayment terms typically are more favorable than a Chapter 13 bankruptcy filing.

Here are six myths surrounding debt negotiation, and the reality behind those myths.

1. Myth: You must pay debt negotiation companies upfront. Truth: In 2010, the Federal Trade Commission (FTC) passed new rules that affected the debt relief industry. Now, debt negotiation companies must negotiate, settle or reduce the terms of a consumer’s debt – and the consumer must agree to the settlement – before the consumer pays any fees.

2. Myth: Debt negotiation erases the record of the debt from your credit report. Truth: Usually, no. In most cases, the record of a debt – along with any late payments – will remain on credit records for the full period allowed, which is usually seven years. The federal Fair Credit Reporting Act (FCRA) allows accounts to remain on a credit report even when they have been paid or settled. That said, the most recent scoring algorithm from FICO (Fair Isaac Corporation) does not factor in delinquent accounts once they have been settled.

3. Myth: Debt negotiation is more expensive than other debt options. Truth: Not necessarily. Compare debt relief methods carefully. Credit counseling often appears to be affordable. But over a typical five-year plan, if you originally owed $20,000, you might end up paying a total of $30,000 (including fees and interest). Evaluate all costs against the benefits you will gain.

4. Myth: Debt negotiation will leave you totally debt-free. Truth: If you owed just credit card debt, debt negotiation can provide a path to resolving that debt, but only if you dedicate yourself to the financial commitments the program requires. Also, debt negotiation cannot resolve debt from most student loans, child support, alimony or taxes.

5. Myth: Debt negotiation is a sign-and-go process with no downsides. Truth: Debt negotiation often is an excellent way to resolve a difficult debt situation. It does have trade-offs, though. During the negotiation process, accounts are delinquent, and lenders can continue to add interest and fees to those accounts. These missed payments can have a significant impact on credit scores. (Keep in mind, however, that if you’ve been struggling to make minimum payments, your credit rating has already suffered.) A creditor also might choose to pursue aggressive collection tactics. This even could include suing for the amount you owe. A credible debt negotiation firm will work with its customers in this event

6. Myth: Debt negotiation companies are fly-by-night. Truth: Most existing debt negotiation companies are reputable, hard-working businesses committed to helping consumers. To make sure you pick a reputable firm, do your homework. Ask questions such as: How long has the company been in business? How many customers has it served? What is the background of the management team? Look for good, relevant education and experience. Ask if the company and its own employees provide service through the life of the program.

If you decide to look into debt negotiation, the first step is to contact a reputable firm. A good place to start is with an industry organization such as the American Fair Credit Council (AFCC). The AFCC does not allow any firm to join if it charges a fee before a settlement is reached. In fact, the AFCC code of conduct for its members is stricter than FTC guidelines. 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 Arbitrators.

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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