Debt Relief Companies » Debt Settlement Programs

Hello, I have $60,000 of credit card and unsecured debt. I have talked with a company that is run by lawyers. They told me to set up my own bank account just for debt settlement. The monthly amount that I would put in the bank would be about half of what I am paying now. They charge 14% which is all witdrawn by ACH from my account over the first 13 months. When there is a settlement, they will have me make the payment from the account. Have you heard of this method?

Scott — Thu, 15 May 2008 15:05:32 +0000

Hello, thank you for the question. Yes, the process you describe is standard for debt settlement. Some companies will actually set up a separate “bank” account for you (often called a trust account) and you would make the monthly deposits into that rather than your own bank.

The reason why some debt settlement companies prefer a separate account, is so that you actually separate the “settlement money” from your “regular spending money”. By making that monthly payment into a 3rd party account it helps some people keep a separate pool of money that they know is being saved for the settlement. It also helps many to resist the temptation to spend that settlement money for other things while it builds in the account.

Debt settlement takes discipline and a firm commitment to wanting to finally get out of debt. Too many people enter debt settlement programs but don’t finish them often due to their lack of commitment. Best to you.

why do debt settlement companies want give you a longer period of time to pay the debt back (84 month)

Scott — Fri, 11 Jan 2008 00:06:24 +0000

Debt settlement company programs are much shorter than 84 months. They are under 3 years. You may have them confused with a debt management program which is typically a 5-7 year program. Debt settlement is shorter beacuse they actually reduce the balance of what you owe on your debt whereas in a debt management program, the balance remains the same and your interest rates and fees are reduced.

Therefore debt management typically takes longer to complete.

How Do I Pay Bills With Debt Settlement Programs?

Scott — Tue, 03 Apr 2007 00:30:43 +0000

When using debt settlement programs to reduce the amount of debt you owe, you will pay the bills that qualify for the program to the settlement company, not your creditors (as you’d usually do).

A typical large debt settlement company will set up a trust account on your behalf with a 3rd party organization like a bank. Once you and your debt counselor determine a payment plan for you, you will make that payment directly into the trust account instead of paying your creditors directly.

Why?

The way the debt settlement programs work is that you stop paying your creditors and instead stockpile money in your trust account until the amount is enough to approach your creditors and negotiate a debt payoff. If your debt settlement company tells the creditor they can pay off a large amount all at once, the creditor is more likely to agree to eliminating a portion of what you owe. It’s part of the debt negotiation process.

Is the trust account safe?

You need to be comfortable with the trust account provider that your debt settlement company will use. Be sure to get the name of the company and research them as well before signing up for a program. In general, the large established debt settlement companies will use large trust account providers.

What Are the Drawbacks to Debt Settlement Programs?

Scott — Tue, 27 Feb 2007 16:10:29 +0000

Of course, nothing is perfect, there are problems with debt settlement programs. Often debt settlement information is provided by salespeople who make it sound too good to be true for many people in debt. It needs to be reviewed carefully as it’s not the perfect solution for everybody.

If I tell a person struggling with credit card debt they can reduce what they owe by up to 60% it sounds perfect. “Where do I sign?” would be a likely response (and often is). However, if you are dealing with a reputable and reliable debt settlement company, they will tell you some of the potential negatives to the program as well.

Your credit score will suffer

Your accounts will be paid off but will not show up on your credit report as “paid in full”

The debt settlement company cannot guarantee they will be successful in negotiating your debts down

Bottom line is that debt settlement is a bankruptcy alternative for those who need to get out of debt because they are past the point where they can reasonably get out of their financial situation without a more drastic solution.

While debt settlement is not perfect, it does help a lot of people who need it and allows them to avoid the even worse case scenario of bankruptcy.