Debt negotiation or debt settlement firms often claim they can get your creditors to discount your debts, so that you end up paying anywhere from 10% to 50% less than what you actually owe. Unfortunately, many of these companies charge steep fees while making promises they cannot keep. If you are considering debt negotiation as a solution to your financial troubles, consult with a legitimate credit counseling agency for advice, and then negotiate with creditors on your own.
What Is Debt Negotiation?
Technically, debt negotiation is when you (or someone acting on your behalf) attempt to get your creditors to accept less than the amount you actually owe in order to settle your debt obligations. You can contact your creditors yourself or designate someone else to negotiate for you. Some legitimate, nonprofit credit counseling agencies will advise you on how to negotiate with your creditors, or they may even contact creditors for you. However, according to the Federal Trade Commission (FTC), for-profit companies that bill themselves as "debt negotiation firms" usually charge hefty fees and often cannot make good on their promises.
Debt Negotiators' Claims Versus Reality
Unfortunately, many debt negotiation companies make promises or guarantees that they cannot (or never intend to) keep. For example, many of these companies:
- guarantee that you'll end up paying pennies on the dollar to settle your debts
- guarantee that some of your debts will be eliminated altogether
- tell you that unsecured creditors never sue debtors for non-payment of debts owed, and
- claim they can remove accurate, negative information from your credit report.
While it is true that creditors are free to renegotiate debts, the reality is that:
- Creditors are not obligated to accept partial payment of a debt.
- Creditors can (and often do) sue consumers for nonpayment of debts.
- No one can remove accurate, timely information from your credit report (to learn more about what creditors can and cannot report on your credit report, see Nolo's Credit Repair for Bad Credit topic).
Some debt negotiation firms can also cause irreparable damage to your credit by telling you to stop paying your credit cards and other unsecured debts. When this happens, late fees and interest are added to your debt, causing the amount due to double or even triple. In addition, creditors may report the nonpayment on your credit report, harming your ability to get credit in the future.
What debt negotiation firms don't say can also hurt you. For example, these companies often fail to tell consumers that forgiven debt may be treated as taxable income by the Internal Revenue Service. (To learn more about taxation of forgiven debt, see Nolo's article Tax Consequences When a Creditor Writes Off or Settles a Debt.) This can result in an unwelcome surprise come tax season.
Debt Negotiation Fees and Scams
Many disreputable debt negotiation firms charge high fees for their services, including:
- a fee to open your file
- monthly fees for services, and
- a percentage of the money you've supposedly saved.
This money could be going to pay your debts, but instead it's being pocketed by the firm. Essentially, you end up adding one more payment to your monthly debt load.
Some firms require that consumers make monthly payments to them, rather than to creditors. Then, according to the FTC and consumer protection agencies, these firms keep some of that money without telling the consumer -- or worse, never pay the creditors at all. The consumer is left with the original debt, plus late fees and interest, all the while having paid large sums of money into the debt negotiation firms' coffers.
How to Protect Yourself From Debt Negotiation Scams
According to the FTC, using a debt negotiation firm can be risky. If you want to negotiate with your creditors -- to reduce interest rates, remove fees, or reduce the amount of principal -- contact a reputable and accredited nonprofit credit counseling agency. A good counselor can advise you on how to negotiate with your creditors yourself or perhaps make some telephone calls for you. To learn how to choose a qualified credit counseling agency, see Nolo's article Choosing a Credit Counseling Agency.
Getting Help With Your Debts
There are many good, safe ways to deal with out-of-control unsecured debt. Instead of paying money to a for-profit debt negotiation company, learn about other ways to get on top of your financial situation. For more information on your options, see Nolo's article Dealing with Debt: An Overview of Your Options. You can get comprehensive information about how to prioritize your debts, make a budget, negotiate with your creditors, and more with Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo).
Portions of this article are based on information from the Federal Trade Commission.