Part Three – A.B.C's of Debt Negotiation

Debt negotiation is a long process that requires discipline and consistency.

How Debt Settlement Works:

When you sign up with a debt negotiation firm, they contact your creditors on your behalf and attempt to negotiate your unsecured debts down to 30-50 cents on the dollar. The settlement company will require you to stop paying your creditors and save money into a bank account each month. The bank account is a FDIC insured special purpose account and is used for settling your debt. The debt settlement company will typically handle one debt at a time until all are settled. They will often try to deal with the most difficult creditors first.

Here is some useful information to be aware of when considering debt negotiation:

1. A Debt Negotiation program should take no longer than 36 Months to Complete. Beware of ones that take longer - they might just be in it for the fees and are not focused on eliminating your debts.

2. Most Debt Settlement Programs Require that Your Accounts be Delinquent before they begin negotiations. That means you will likely have to stop paying your bills and that your credit is going to suffer significantly in the short-term.

3. Most programs require that you have a minimum of $10,000 in debt. Negotiators want a significant amount of debt to work with.

4. Most debt negotiation firms will only negotiate unsecured debt. Secured debt, such as a mortgage or a car loan, can simply be foreclosed or repossessed if you stop paying. While there are some firms that will try and re-negotiate these debts for you, and some that are successful at doing so, be careful - you could get your property taken away if you stop paying your secured debt.

5. Your credit will be negatively impacted in the short term if you enter a debt settlement program. See #2.

6. Once you stop paying your creditors they have a right to file judgment against you and potentially try to drag you into court. Most creditors want to avoid filing a judgment because it is more expensive and time consuming, but it is still a possibility.

7. Creditors will continue to harass you once you enter a debt settlement program. The calls will keep coming and coming until your negotiators start settling with your creditors.

8. You should have complete control over your special purpose account that is used to settle your debts. A special purpose account is set up when you begin your debt settlement program and is used by your negotiators to settle your accounts. You should make sure that you have complete control over this account and that it is set up in your name before you sign up with a program.

9. You should review your debt negotiator’s fee schedule before signing up for a program. The debt negotiator should provide you with a precise accounting of their fees on a month-by-month basis for the entire duration of your program.

10. A debt negotiator’s fees are typically 15% - 18% of the total debt that you are settling. Law firms that settle debt will usually charge twice as much. A worthwhile debt negotiator should start accruing money into your trust account before their fees are paid. Typically, the negotiator will take a portion of the money that you pay into your special purpose account for the first 12-21 months of your program and apply it to their fees. Beware of companies that charge more than 20% of your total debt in fees, and that do not start applying money into your special purpose account until their fees are completely paid. Also, beware of companies that charge a monthly fee for the entire duration of your program.

11. You Need Contracts! All of the points discussed above should be represented in a comprehensive contract that your prospective negotiator provides you upon signing up with a program.

12. If you would like to attempt to negotiate directly with your creditors, this is also your option. And it might actually work. However, from my personal experience, most credit card companies are pretty inflexible until the situation reaches a crisis level, at which point they are typically, but not always, willing to re-negotiate.