Debt Negotiation 101
- Thursday, November 20, 2003
The ads are compelling. Settle your debts for a fraction of what you owe, like Mr. Gregg who paid off $22,569 in credit card debt for only $3,160.
The commercials go on to suggest that banks and credit card companies are desperate for cash and will agree to accept pennies on the dollar to "settle" your debts. Sounds great, but can "professional" negotiators deliver on their promises?
Debt management is an umbrella term that refers to all kinds of activities aimed at controlling and reducing debt including, but not limited to, consolidation, counseling, debt repayment, settlement, bankruptcy, deciphering credit reports and credit repair. Debt negotiation is most often confused with debt consolidation and credit counseling, all of which are quite different.
Debt consolidation. Consolidation is the process of transferring a number of smaller debts to a new loan that has a lower payment than the smaller payments combined. Consolidating is not always a bad idea. In fact, under the right circumstances it can be beneficial. But it’s tricky. If debt consolidation is just a delaying tactic that does not address the underlying problem which allowed the creation of too much debt in the first place, consolidation can make things even worse. Used strategically, however, debt consolidation can actually speed the process of getting debt-free without asking creditors for concessions or harming one’s credit report.
Credit counseling. A credit counselor or counseling organization acts as a middleman between you and your creditors. The counselor assesses the situation and then goes to the creditors and pleads for mercy on your behalf. Some creditors are willing to reduce interest rates and fees (not the principal) in an effort to help you avoid bankruptcy. The counselor sets up a payment plan you can handle and commences to manage your debt situation.
Credit counselors typically charge a small fee and also earn a commission from the creditors. Each month you make a single payment to the counseling organization through their debt management program, and they in turn pay your creditors. A good credit counseling organization is a true non-profit, makes payments on time and offers education to make sure that once you are out of debt you will stay that way.
But credit counseling is not all sweetness and light. There is a price to be paid for the forgiveness of fees and reduction of interest rates. Your credit report will reflect that you are enrolled in a credit counseling program. It’s up to future lenders to decide if that is a negative mark or a sign that you took responsibility and chose against bankruptcy.
Debt negotiation. Sometimes referred to as "arbitration," or "accord and satisfaction," debt negotiation involves cutting a deal with a creditor to make a one-time cash payment that is considerably less than the current amount owing. But there’s a small matter of having to come up with a big chunk of cash should the creditor agree to settle.
At first glance this sounds pretty cool: Run up a great big balance and then negotiate a greatly reduced cash settlement. The truth is it is anything but cool. For starters, negotiation and settlement will result in the destruction of your credit report. But there’s more.
How it works. It is important to understand that debt negotiating is not a regulated profession so there are no "rules." Anyone can call himself a debt negotiator. There is no training, no certification or licensing required. And the scariest part? Most debt negotiators require their clients to deposit huge sums into their equally unregulated company "trust accounts" before negotiations can commence.
Basically this is how it works. You hear or read some slick and compelling ad that promises you can really stick it to your creditors by paying a lot less than you owe. You meet with the debt negotiator in person or by phone. You list your outstanding balances, and they come up with an amount they believe your creditors will accept. Typically it’s 50 to 60 percent of the total, and could be thousands of dollars. Next, you must deposit that amount with the negotiator.
If you don’t have that kind of cash lying around the house (show me someone in dire financial straits that does), they set up a monthly payment plan. Of course they add in their fee which can be anywhere from 20 percent of what they hope to save you or 11 percent of your total outstanding debt. No matter how you look at it, we’re talking about a lot of money.
Next, if you are not behind on your payments, the negotiator will likely hint [wink, wink] that your creditors will have little motivation to arbitrate for a less-than-full pay off unless you are two or three months behind on payments and they believe recovery is not likely. They will suggest that instead of making your payments for the next few months you deposit that money with them to be held for your settlements.
When the full amount is on deposit, the negotiator commences to contact your creditors with offers to settle. In theory, each of your creditors jumps for joy upon hearing of your offer, the negotiator writes out all of the checks, delivers them and you end up debt-free. Sure, right. If only it were that simple.
Briggs, Baker and the BBB
If the name Briggs & Baker rings a bell, you’re probably familiar with this company’s radio commercials touting the benefits of debt negotiation. Some time back Briggs & Baker took the southern California air waves by storm and some other areas of the country as well. In preparation for this article and based on a tip from an angry B&B client, I checked out the company with the BBB (Better Business Bureau (www.bbbsouthland.org), where I found the following:
This company has an unsatisfactory business performance record including a pattern of complaints alleging the company failed to negotiate debts, failed to pay creditors, [clients’] credit standings deteriorated after enrollment and the company failed to provide adequate service. A few complainants allege that while in the program customers were sued by creditors or debts were arbitrated under the cardholder agreements. Some customers complained that creditors continued to contact them or they were turned over to collection even though they were led to believe by the company this would not occur. A few complainants allege they were instructed not to pay their debt as it would improve the company’s ability to negotiate settlement. ... Be aware that the time it takes to settle debt will depend on your ability to save money and the willingness of the creditor to accept partial payment.
Radio talk show host, Benjamin Dover, recently spoke on air with several people who had been clients of Briggs & Baker. One man told his truly sad story of taking more than $30,000 from his 401(k) retirement account to deposit with Briggs & Baker for his settlement program. When the company failed to deliver on their promised settlements he ended up filing for bankruptcy. If that wasn’t bad enough he got hit with a big IRS penalty for dipping into his 401k account.
Another guest told of writing checks totalling over $17,000 to Briggs & Baker from which the company took $12,000 as their fee. When the company would not stand behind their promises and the situation dragged out for so many months, he ended up settling his debts on his own. Briggs & Baker refused to refund any of their fee, and he walked away having learned a very expensive lesson.
I read dozens of similar accounts from people with various experiences with this firm and others. Over and again these clients said they were misled and misinformed. They were instructed that their lenders wouldn’t be motivated to settle unless they were at least two to three months behind.
When their settlements didn’t come through they were in a real mess.
What Negotiators Won’t Tell You
1. If you’re maxed out and stop making payments on your credit card accounts, you’re going to get hit with a late fee and an over limit fee every month. Now expose all of that to the already outrageous double-digit interest rate and your effective APR can zoom to 40 percent or more.
2. A creditor can agree to a settlement and even after you’ve paid it that creditor can (and probably will) pursue the balance at a later date by turning it over to collection. Settlement can be tricky.
3. Lenders report settlements to the credit bureaus as "Settled." This will appear on your report as an R9 which is the lowest possible rating, just one notch above bankruptcy. It will stay there for 7 years from the date of final payment.
4. You can negotiate your own settlement directly with your creditor. One lady reported that when she called on her own behalf she was treated rudely, but when she had a friend call as her representative, she was treated professionally and eventually negotiated a settlement.
5. If the amount forgiven by settlement exceeds $600, expect to hear from the IRS. The creditor is required by law to report the forgiven amount as taxable income. You will receive a Form 1099 showing the amount you must claim as income on your next tax filing.
Debt negotiation is so problematic, it should really be seen as a last-resort measure, if ever, and only after giving credit counseling a fair chance.
I will concede that there may be circumstances when negotiation is an appropriate course of action. Examples might be when both the creditor and debtor are anxious to reach a compromise or in the case of an old forgotten debt, an "inherited" debt from something like a co-signing gone bad or a large medical debt.
I hope it never happens, but if you should find yourself in need of a debt negotiator and you cannot represent yourself, do your homework and then carry a big stick. Here are some guidelines to follow:
- Check out the company with the Better Business Bureau in your area as well as your State Attorney General.
- Make sure you know the fee structure. Is there a monthly charge? A set-up charge? A penalty for leaving the program? Are these fees mandatory?
- Make one of your deal points that the lender will report "paid as agreed" to the credit bureaus.
- Do not stop making payments on your debts in an effort to trick your creditor into negotiating more aggressively.
Under normal circumstances of just too much debt, you have much better and more ethical alternatives:
Develop your Rapid Debt-Repayment Plan®. One of our most important tenets of "Cheapskate Monthly" and "Debt-Proof Living" is our do-it-yourself plan that helps you get yourself out of debt quickly and honorably without paying a penny in fees or stiffing a creditor for even a dime. It’s exciting and it works. Read Chapter 7 of my book, "Debt-Proof Living," for the entire plan and also see a demo of the RDRP Calculator® at our website, www.cheapskatemonthly.com.
If you are behind, cannot get caught up and are continually unable to make even your minimum monthly payments, seek the help of a reputable credit counseling organization like Consumer Credit Counseling Services of Atlanta, 800 251-2227; www.cccsatl.org.
Beyond the logistics of how it works is the matter of ethics and right-living. Lenders have the legal and moral right to full payment under the terms to which you agreed, regardless if you’ve now soured on those terms. Paying your debt is the moral thing to do.
If by chance you are tempted to sign on with a debt negotiator — and have the ability to plunk down 60 percent of what you owe in cash — why don’t you do the right thing and pay down your debts with that money, now?
Copyright © 2002 The Cheapskate Monthly. All rights reserved. Reprinted with permission.
"The Cheapskate Monthly" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.
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