Dear Debt Adviser,
Are the companies that advertise negotiating debt on a consumer's behalf to pennies on the dollar legitimate? Is this a good way to get out of, say, $70,000 worth of credit card debt?
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I see from your email address that you are affiliated with a university. So here is a question for you and your classmates to debate. If I owed you $70,000, what would be a good way to get out of repaying you? Sounds different when it's your money that I want to get out of returning, doesn't it?
In reality, there is no good way to stiff someone. But that hasn't stopped a lot of people from trying. What they find usually is that they are trading one problem for another. The problem of repaying the debt may go away, but the problem of damaged credit takes over and can be worse.
Those advertisements do sound seductive, don't they? I'm afraid what might look good on paper or sound good on TV has its drawbacks. Legitimate debt settlement companies do exist, but their success rate for resolving all your debt issues without creating new ones is not very good. Because the industry is lightly regulated and has few national standards, it can be difficult to tell a good debt settlement company from one that will make a mess of your finances.
The key to a debt settlement arrangement is having cash that can be sent quickly to satisfy a creditor who has less confidence you'll pay them back over time. So, first you need the settlement cash in hand. Once you have it (anywhere from 30% to 60% of what you owe), I suggest you first try negotiating with your creditors yourself. If you can't come up with a lump sum, you can still try to get a payment plan you can afford by asking for lower payments and lower interest. But this won't get you out of paying what you owe, so let's go to the next step.
If you can't strike a deal for less than you owe, I recommend you contact an attorney who specializes in debt settlement. The attorney will take over communications with your creditors and negotiate a settlement on your behalf. Attorneys may be expensive, but they are professionals with a code of ethics and a good track record of dealing with legal issues. They will explain all your legal options, such as using the statute of limitations or bankruptcy laws to resolve your situation.
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I have found sometimes people are determined to go through with what I think is an unwise course of action. If you are determined to try a debt settlement company and have them handle your money and negotiate settlements with your creditors, I strongly recommend you choose a company that is a member of The Association of Settlement Companies, and do not work with any company that charges an upfront fee.
A debt settlement or bankruptcy will damage your credit and hurt you in ways you may not have thought through. The financial system has penalties built into it to exact a price from those who fail to live up to their obligations. A bad credit report can mean more trouble finding a job, a place to live or future loans for the next several years. But bad credit isn't the end of the world, especially if you have no other viable choices left. In seven to 10 years, the negative information will be behind you and you will have another chance to use credit wisely.