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Debt negotiation companies are a type of debt management organization used by consumers that have fallen too far in debt. They are also the most likely to be a fraudulent company promising what can't be delivered. Credit counselors work with you to develop a budget that can cover your minimum living expenses while paying off your debt by yourself. Debt management organizations negotiate with your creditors and develop a payback plan. You pay them each month and they in turn pay your creditors. Debt Management Plans usually do get concessions from your creditors like lower interest rates and waiver of late fees. Debt negotiation companies promise to get your creditors to actually lower the amount owed. Very unlikely. The promises continue. They say that entering a debt negotiation program will protect your credit rating. Even less likely. If they do manage to get a creditor to write off part of your debt, you can be sure that creditor will report it to the credit reporting agencies. For seven years your credit report will show that a creditor had to write off part of your debt. With that entry, if you do talk some creditor into a small loan it will come with interest in the high 20% range and probably still require a co-signer.
Many states regulate debt negotiation companies and limit the services they can offer. Why? First, most represent themselves as non-profit companies. Nothing could be further from the truth. You will pay for their services. Other claims that got the attention of several state's Attorneys General are the debt negotiation companies usual insistence that you stop paying your creditors and immediately start sending those payments to the debt negotiation company before they even start to negotiate with your creditors. What happens when the creditors say no? First, even if they happen to say yes, you have missed several payments and incurred late fees and penalties that probably include a higher interest rate. Second, your credit rating is heading downhill. Third, you don't have your money. The debt negotiation company does. Fourth, when you sent in your money, they did some work for you even though there was no positive result. They expect to be paid for that work. Fifth, someday not in the your near future (they will say that they are still trying) the company will take whatever they want for payment out of what you sent them and finally return the rest to you.
If the debt negotiation company is honest, they work much the same way as a Debt Management Plan. After they sign up your creditors that are willing to participate, you will make your monthly payments for those creditors covered by the agreement to the company and they will in turn pay your creditors. What's different between the two types of organizations is debt negotiation companies charge consumers not only a monthly fee but also a final fee based on what the debt negotiation company estimates as the money you've saved. A number likely to be much higher than your actual savings.
Let's say that you found an honest debt negotiation company and they were able to get some of your creditors to reduce the amount you owed. There are other pitfalls that you should be aware of. besides the obligation of your creditors to report that they wrote off a part of your debt. Some creditors may in fact not write off your debt but instead go to court to sue you for the remainder of the debt not covered by the agreement. If the creditor wins the lawsuit, they have the right to garnish your wages or, in some states, even put a lien on your home. Finally, the Internal Revenue Service will probably consider the amount of forgiven debt taxable income.
If you feel that you may need help in this area then here is our best pick for a debt consolidation company.
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