Our investigation of debt settlement revealed that in essence, debt settlement (aka debt negotiation) is where past due accounts are negotiated for less than the full balance, payable typically in a single payment. Most debt settlement companies work for a percentage of what they save the consumer. Many debt settlement companies establish bank accounts in the name of the consumer. Monthly payments are made by the consumer and accumulated in the bank account to settle the accounts.
Debt settlement is not like consumer credit counseling or debt management companies in most respects. The goal of the debt negotiator is to reduce the overall amount of the debt. Consumer credit counseling or debt management companies work to reducing the interest and/or the monthly payments and not the principal balance.
Debt settlement, like consumer credit counseling, requires that the accounts be delinquent. The difference is that where consumer credit counseling makes monthly payment agreements with creditors early in the delinquency (30-90 days) and routes monthly payments to the creditors: debt settlement usually results in longer periods of delinquency because the monthly payments are not routed to the creditors, they are accumulated in a separate account until sufficient to make single payment settlement offers.
Based on what we found there is no question debt negotiation potentially offers the greatest savings when compared to other debt elimination alternatives: credit counseling, debt management, debt consolidation*. Our research indicates that almost all creditors, collectors and finance companies routinely accept less than full balance settlements to resolve past due accounts. The amount accepted varies by creditor, and circumstance, but evidence indicates settlements for 25% of the balance is not uncommon with 50% being the typical settlement amount.
We did find controversy surrounding the effect that debt negotiation has on the credit rating. The reason is that the accounts must be delinquent in order to negotiate the balance. For consumers with accounts already delinquent this is of no consequence but for people whose accounts are current, they should first determine what impact the debt already has on the credit. If their credit is already effected the debt negotiation may be the "lesser of two evils" option when compared to continuing to pay minimum monthly payments for 30 years. However if the credit is still strong other options like debt consolidation is probably the better choice.
It is recommended that prior to choosing this option a consumer take certain precautions:
Understand the debt negotiation process
The consumer needs to be clear about what debt negotiation entails. Debt negotiation is not debt consolidation or credit counseling though we found many consumers confused on that point and many debt negotiators that market themselves very similarly to consumer credit counselors. The monthly payments you make are not being sent to your creditors. Your accounts can only be negotiated if they are past due.
Understand your cash flow
The consumer needs to understand that their cash flow is critical in their expectation of results. If it is going to take 5 years of monthly payments to accumulate enough money to settle the accounts then negotiation is probably not a viable option.
Choose the debt negotiation company wisely
The one common denominator in all our research is that when it comes to service providers, not all are equal. This is particularly true with debt negotiation. Consumers should insure that the debt negotiator is legitimate and that the debt negotiation fee structure is congruent with their best interests: it is recommended that a when considering a debt negotiator that the consumer:
- Never pay the settlement fees in advance;
- Make sure the settlement fees that are a percentage of the savings: not the STARTING balance;
- Make sure the company is in good standing and check the with better business bureau.
