Debt Settlement Companies

The Top 4 Questions People Have Are Answered Right Here

Debt settlement companies are a mystery. Or so it would seem based on the number of people who have questions about how they operate, how much they charge, what services they offer, how money is handled during the program and how much consumers can actually save by using their programs. Not to mention who exactly these types of programs are suitable for.

And for the most part, the questions that people have, fall into one of four categories. Case in point. At a recent workshop on debt settlement held by the FTC (Federal Trade Commission) most of the questions asked by participants (presumably people who were considering debt settlement as a debt relief option) were focused on one of the following areas:

1. Fees: what fees will they be charged, when and how those fees are paid and what the companies do to earn those fees

2. Disclosures: the types of disclosures that are made by the debt settlement companies prior to a customer signing on for the program

3. Handling Of Funds: how the funds (the consumer's) that will be used for debt settlement and fees are handled

4. Education: the education that is provided as part of the service

Answering those questions was a difficult task, as the debt settlement industry at the time was a bit like the wild west in terms of any type of regulations and laws. In other words, it was a bit of a free-for-all, with debt settlement companies pretty much running their businesses how they saw fit. As of October 2010 however, that all changed.

Effective October 27, 2010 the FTC enacted what it called the "Final Rule" which are a series of amendments to the FTC's Telemarketing Sales Rules (TSR) that pertain directly to "for-profit" debt relief companies that sell their services over the telephone (legitimate non-profit debt relief companies are exempt from these rules).

For the most part, this Final Rule addresses many of the questions and issues that consumers had when it comes to the debt settlement/negotiation industry, making it easier (and less risky) for them to pursue this debt relief option as a means of getting out of debt. Here's a closer look at how these laws affect the four areas of concern.

1. All About The Fees That Debt Settlement Companies Charge

It's not surprising that one of the top concerns that people have about dealing with debt settlement companies has to do with the fees that are charged, and what they are being charged for. More specifically, how the fees are calculated, how and when they are collected and exactly what services you get in return for those fees.

Because the debt settlement industry is a fairly young one, how fees are calculated and collected by companies has evolved over the past 10 to 15 years to the point where there are now two basic fee models:

1. Percentage Of Savings Model

When debt settlement companies first started in the 1990's, this was the predominant (if not the only) fee model that was used. Companies charged their customers a fee based on a percentage of the savings that they realized upon settlement of the debts.

2. Flat Fee Model

As time passed the flat fee model emerged, and today it is by far the most popular way that debt settlement companies and debt lawyers charge their clients. Under the flat fee model consumers are charged a fee that is calculated as a percentage of the overall amount of debt that is enrolled in the program. Keep in mind that if that debt grows during the course of the program (which it undoubtedly will due to ongoing interest charges and possible penalties) the fee should still only be based on the original amount enrolled.

As a rule of thumb when it comes to calculating debt settlement fees, you can expect to pay anywhere between 15% and 25% of the total enrolled debts. This fee will vary from company to company, and will also vary depending on other factors such as the number of debts and the amounts of those debts.

But no matter how the fees are calculated and collected, you must make sure that it is laid out clearly and precisely in the settlement agreement that you sign with the company. If you are unsure, ask. Never trust a verbal assurance either. Anything to do with fees must be in writing.

When Are The Fees Due?

As a result of the Final Rule, an "advance fee ban" is now in place within the for-profit debt settlement industry. In other words, companies cannot collect a fee until a debt is settled. This safeguards the consumer from debt settlement companies that charge (and collect) fees for services that never take place. The bottom line now is that you don't pay until the debt is settled.

There are some exceptions to this however. Debt settlement companies and lawyers that deal face to face with their customers are not bound by these rules. So as I said earlier, make sure you get everything in writing before you sign up for a settlement program to ensure there are no surprises.

My advice? Regardless of whether or not the company/individual you are dealing with is required by law to follow the advance fee ban, you should demand that they do, or seek the assistance of another company. Period. There is simply no need to pay up front for these services nowadays.

Are These Settlement Fees Excessive?

One of the complaints that has arisen with respect to the debt settlement industry is that the fees charged by debt settlement companies offering these services are excessive. More specifically, the fees charged in comparison to what is charged for debt management programs are out of line. However, settlement companies contend that this is simply not the case, and cite three specific reasons as to why this is...

1. The costs of acquiring customers combined with running and administering a debt settlement program are much higher than a debt management program.

2. The interest rate that is "effectively" charged by debt settlement companies is much less than what is actually charged by creditors.

3. The per client fees that are typically earned by debt management companies actually exceed those of companies negotiating debt settlements.

Are these valid arguments? Perhaps, perhaps not. But as I mentioned earlier, you can expect to pay a fee that ranges from 15% to 25% of the amount of debts that you enroll. From there it is up to you to decide whether it is worth it or not.

2. What Debt Settlement Companies Must Disclose To You Prior To You Enrolling In Their Program

"Just what am I getting myself into!?"

"Are debt negotiation companies scams!?"

These are just a couple of questions that people ask themselves when considering enrolling in a debt settlement program. Call it the "fear of the unknown" if you will. Signing on to have your debts negotiated is a big step, and the last thing you want is to find out important details about the program after you have already jumped in with both feet.

So what do these debt negotiation companies (the terms debt negotiation and debt settlement are often used interchangeably) have to disclose to you before you sign on? Luckily the Final Rule makes this a much less "gray" area. The FTC  points out that debt relief providers must disclose the following...

• the possible negative consequences that may result if you use their service (ex. negative impact on your credit score and/or credit report)
• how much their service costs and when fees will be payable
• how long it will take you to see results once you begin the program
• whether or not they require you to deposit funds into a dedicated account to be used to pay both settlements and fees (not all companies require such accounts)
• any other information that is "fundamental" to their service

What a company discloses to you up front is likely a good measuring stick if you will as to how honest and forthright they are. On that note, here are a few other things that reputable debt settlement companies should disclose to you before you sign up for their program...

• you will need to save money over the course of the plan in order to fund settlements
• creditors cannot be forced to enter into negotiations or to settle debts (This is why you typically must stop paying your creditors once you begin the settlement process. If you are still paying them, why would they want to negotiate with you?)
  
• debt settlement can have a negative impact on your credit report and your credit scores
• entering a debt settlement plan does not prevent your creditors from continuing to try and collect from you. Among other things they can still call you, send your account(s) to collections, sue you and garnish your wages if they receive a judgment against you.
• only certain debts can be successfully negotiated
  

When you are interviewing potential debt settlement companies it would be a good idea to use a complete list of disclosures that all companies should make to you, (you can find one here) as a checklist of sorts to make sure that...

a) the company is not holding anything back and

b) that you don't forget to ask the right questions.

In addition to having to disclose this information, debt relief companies are also prohibited from making false representations when it comes to their services. For example, among other things, companies cannot misrepresent past success rates of their service, nor can they misrepresent themselves as a non-profit entity.

Now, it's one thing to enact laws, and quite another to make sure that companies obey them. So how do you know you are dealing with a debt relief company that has actually adopted practices that completely comply with the new Final Rule? One way is to only deal with a company that is a member of the the AFCC or American Fair Credit Council (AFCC). The AFCC was formed in April 2011 to ensure that its member companies fully complied with the new initiatives of the Federal Trade Commission. The AFCC also takes the place of a former trade association called The Association of Settlement Companies or TASC.

In order to qualify as a member of the AFCC, companies must abide by the the strict code of conduct. And in order to ensure continued compliance with this code, the association has two separate programs to keep their members in check that were adopted from the former TASC rules. Read more about these programs and how they help protect consumers here.

3. Who Handles The Money You Are Saving For Settlement Purposes, And How Is It Handled?

In most instances, people going through a debt settlement program will be required to set aside savings each month that will eventually be used to pay any final settlement amounts reached between you and your creditors. And depending upon the amounts of your debts and the size of the settlements required, this can add up to a lot of money over time. Which begs the question, who controls that money and how?

Under the laws of the Final Rule, debt settlement companies may require consumers to open a "dedicated account"  into which future fees and savings for settlement agreements will be placed. These accounts are still controlled and owned by you, the consumer, and the money can be withdrawn at any time without penalty.

4. What Educational Programs Are Offered In Conjunction To The Debt Negotiation Process?

The last of the four major areas that people have questions about is the education provided to clients by debt settlement companies once the client enters. The education that you will receive during the program can be broken down into two areas.

1. The education provided to you by the company, which includes budget preparation, and access to resources through consultants, websites and written material. And...

2. The "hands-on" education that you will receive by actually following the program and completing it over time.

Learn more about the education side of the settlement process here.

Choosing The Best Debt Settlement Companies

Making the decision to enter into a debt settlement program should not be taken lightly. If you can pay back your debts in full then you should make every effort to do so. Not just because it is morally the right thing to do, but also because chances are it is the best thing to do financially. But if you do decide to go the route of debt negotiation, then make sure that you end up using a solid, reputable company that will support you and guide you through the process.