Credit Consultant and Debt Settlement Company

Settling Your Debt

Debt settlement is when your credit card company agrees to reduce the amount of debt you owe if you agree to pay a certain amount of the outstanding balance each month. Some companies ask for you to agree to an automatic payment from your checking account. The reduction in your balance could include part or all of the late fees, over limit fees and finance charges which have been charged to your account. In some cases, your credit card company may also be willing to lower your interest rate or settle even more of your debt.

The first step is an introductory consultation with a credit consultant who will review your debt, talk with you about your financial situation and give you some general information about debt help. The consultant can give you an estimate of the amount of debt that you may be able to settle as well as the cost you would be charged for the debt settlement process.

You will be given a contract to read and sign which details the actions to be taken by the credit consultant and debt settlement company.

At a second meeting, your consultant will start giving you tips on how to improve your budgeting and money management. You will be asked to bring in your recent bills and credit card statements. An action plan will be developed and discussed with you. Negotiation specialists at the debt settlement company will then contact your credit card companies to identify how much of your debt can be settled.

Selecting a Credit Consultant and Debt Settlement Company

The company should have a good reputation for being able to provide professional counseling as well as the ability to negotiate a fair settlement of your debt. Avoid working with a company that:

• Makes you feel uncomfortable in any way
• Guarantees that they will be able to reduce your debt
• Tells you to make your payments to the company instead of the credit card company
• Says debt settlement will have no negative impact on your credit report
• Promises to remove any accurate negative information on your credit report
• Charges substantial monthly service fees

The U.S. Department of Justice has produced a list of companies with approved financial management courses. These companies may be debt settlement companies or they may be able to provide you with a recommendation for a company in your area.

A local debt settlement company may be the most convenient since you will probably want to meet with your consultant in person. Check if there are any negative reports filed about the debt settlement company with your state Attorney General, your local consumer protection agency and the Better Business Bureau before you make your final decision.

Cost

There is usually no charge for an initial consultation with a debt settlement company. If you subsequently decide to sign a contract for debt management services, a fee of $50 to $100 may be added to the contract to pay for the time spent by the consultant working with you and the people working on your behalf with your credit card companies.

Some debt settlement companies are non-profit and provide their services at no charge or for a very small fee. Other companies are for-profit and may charge up to 50% of the total debt settled. Be sure you read the contract before you sign.

Taxes

The Internal Revenue Service considers any amount of debt reduction over $600 as taxable income. A $10,000 savings on your credit card debt would be viewed by the IRS as $9,400 in taxable income on your next tax return. Be sure you set aside enough money to pay this added tax liability.

Other Alternatives

Credit counseling and credit card debt settlement can help you lower your debt and get you on the road to paying off your credit card balances. However, it can negatively affect your credit rating if one of your creditors places a notice on your credit report announcing that you settled all or part of your debt with a debt management service. This negative notice might affect your ability to get credit for the next several years.

There are other alternatives to using a debt settlement company. Consider all your options before you make your final decision.

Do It Yourself Debt Settlement

You don't need to have a company negotiate fee and debt reduction with your credit card companies. You can do it yourself. It is not difficult; but, it does require strong negotiation skills, patience, good note taking and a significant amount of time on the phone.

Debt Consolidation

A debt consolidation loan lets you roll your credit card balances into one loan and pay it off over time with a lower interest rate than you were paying on your credit cards. There are two major types:

• An unsecured loan. This is a loan for a specific amount of money offered to individuals with at least an average credit score. There are usually no late fees and the interest rate may be lower than your current credit card rates.
• A home equity loan or line of credit. This loan is secured by your home and is available from your bank or mortgage company. The interest rate will probably be lower than credit card interest rates and the interest you pay may be tax deductible. Consider this option carefully since you could lose your home if you are unable to make all the payments on your home equity loan or line of credit.