5 things to know about your debt negotiation partner - KUAM.com-KUAM News: On Air. Online. On Demand.

5 things to know about your debt negotiation partner

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By Andrew Housser

Ten years ago, debt relief was still a new frontier in the financial industry. Thanks to stiffer bankruptcy regulations passed in 2005, many people could not qualify for bankruptcy protection. In fact, bankruptcy filings fell by 70 percent between 2005 and 2006. More people began turning to companies that negotiated with creditors for affordable debt repayment plans.

Some of those companies couldn’t deliver the results they were promising, either because they were bad business operators or bad actors – or both. In October 2010, the Federal Trade Commission (FTC) stepped in. The FTC’s new rules changed the way consumers pay debt negotiation, or debt settlement, companies. The FTC rules require these companies to negotiate settlements with creditors on a debt before consumers pay for the service. In the aftermath, many debt relief firms decided to leave the industry rather than comply with those rules. The remaining firms earn their money in complete alignment with their customers’ interests; they get paid when their customers get results.

In the six years since the FTC implemented the regulations, consumer debt has continued to increase. Today, consumer debt stands at a staggering $17.63 trillion, including non-revolving debt (such as student loans) and household mortgages. That equates to nearly $55,000 in debt for every individual in the United States. The average American who carries credit card debt owes more than $15,675 on those credit cards.

The good news? Those who need debt relief help can find greater assurance with companies that follow the FTC rules. Here is what you need to know about getting debt help.

What is debt negotiation (debt settlement)? Debt negotiation firms negotiate on behalf of a consumer – based on the consumer’s financial hardship and inability to pay the full amount due – to reduce the debt obligation the consumers have to credit card companies, medical offices or other creditors of unsecured debt.  (Unsecured debt is debt that is not backed by a tangible asset, such as a vehicle or house).   

1. What are the benefits of debt negotiation? Debt negotiation can help you get out of debt in 24 to 48 months. Debt negotiation firms often are able to reduce debt load by 50 percent (not including fees). The process generally is faster and less expensive than credit counseling, and requires a lower minimum payment. In addition, repayment terms typically are more favorable than filing for Chapter 13 bankruptcy. Because you are unable to pay creditors while the debt negotiation firm is negotiating new terms, you save as much as you can. This will help the debt settlement company settle your debts as quickly as possible. These savings are set aside in a separate bank account that you establish and control. Over time, you use these funds to repay creditors the lower amounts that the debt negotiation provider secures on your behalf.

2. What are the downsides of debt negotiation? You will miss payments during the negotiation process. During that time, lenders add interest and fees to your account. These missed payments can have a significant negative impact on your credit score. That said, the typical debt negotiation consumer has been struggling to make minimum payments, so will likely experience a negative credit rating impact regardless of enrollment in the program.  It is possible that a creditor could pursue aggressive collection tactics, including suing for the amount you owe. That is why debt negotiation is only for people in very serious debt, and who otherwise would need to consider bankruptcy or perhaps credit counseling.

3. What do the FTC rules mean? In the past, companies could charge consumers upfront fees for their services. The 2010 FTC rules included an Advance Fee Ban. Under this rule, debt relief 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.

4. How do I find a reputable debt negotiation firm? The American Fair Credit Council (AFCC) is a good place to start a search. The AFCC does not allow any firm to join if it charges a fee before a settlement is reached. The organization also enforces a strict code of conduct. In fact, the AFCC code is more stringent 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.

Before you agree to work with a debt negotiation 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 fully understand the firm’s process. Look for a company that has an established track record of success for clients and is willing to share that information with you.

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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