Debt Negotiation - Is It For You

A neat idea but buyer beware

 Debt negotiation is a new type of debt relief option to alleviate debt burdens over a relatively short time span usually 12 to 36 months.  While it certainly can help some people it is definitely not for everyone.  It is perhaps, the last option before bankruptcy.

Essentially what a debt negotiation firm does, is represent you to your various creditors and negotiates a reduction in your outstanding balance of unsecured debt (typically credit cards or unsecured consumer loans).  Many creditors are willing to discount balances up to 50% and either drop the interest all together or charge significantly less.  

This reduced total debt and reduced or no interest, allows for significantly reduced monthly payments.  Reduced debt, lower monthly payments, sounds great.  Where do I sign up?

For starters, debt negotiation programs are not for people with fair to good credit, or multiple income sources, or own valuable assets. Debt negotiation is available typically to people who can demonstrate a real financial hardship who without this program, would probably have to declare bankruptcy.

If you fall into the seriously financially strapped category, the first thing you want to do is find a Debt Negotiation firm and that’s the tricky part.

Debt negotiation differs greatly from credit counseling and debt management plans. It can be very risky, and have a long term negative impact on your credit report and, in turn, your ability to get credit. That's why many states have laws regulating debt negotiation companies and the services they offer. Contact your State Attorney General for more information.

Just because a debt negotiation company describes itself as a "nonprofit" organization, there's no guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt.

In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. This can cause your original debt to double or triple.

What's more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you've supposedly saved.

While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report.

 And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income

If you decide to work with a debt negotiation company, be sure to check it out with your  State Attorney General, the Federal Trade Commission, and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you're considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.