Debt Negotiation Programs

Being in debt is stressful, especially if you struggle to make payments. Late payments can wreck your credit score. Debt collectors can be aggressive, adding to your anxiety and worries. You are not alone. There are debt relief options.

Besides nonprofit credit counseling, debt consolidation loans and debt management programs are options. Bankruptcy is also a choice but is usually a last resort.

One option for debt relief is a debt negotiation program (DNP).

What Is a Debt Negotiation Program?

Debt negotiation programs work with your credit card companies and other creditors to accept less money to settle your debts. These programs are sometimes called "debt settlement companies" or "debt settlement programs." Debt Negotiation Companies are often set up as nonprofits, though some state laws have tightened requirements for debt service companies.

A debt arbitrator for the DNP will negotiate a debt settlement plan. If you cannot pay a lump sum, the DNP may ask you to make monthly payments into an escrow account. The DNP may also have you stop all communication with creditors as you build up a savings account in escrow. Once the account has enough funds for debt payments, the DNP will negotiate a lump sum settlement offer with creditors and lenders.

But, your debt will increase during this time with interest accrual and late fees. Your creditor may sell your account to debt collectors or write off your debt, which wrecks your credit score. Plus, your creditors do not have to work with DNPs.

These programs are not the same as credit counseling agencies, debt consolidation programs, debt relief companies, or debt management plans (DMPs).

Some DNPs offer legitimate, accredited debt relief services and are valuable for certain types of debts, such as credit card debt or overdue medical bills. But many of them can be risky and harm your credit rating.

Finding Accredited Debt Settlement Services or DNP

Finding a trustworthy debt relief program takes a little research. There are ways to ensure you choose an accredited program.

The American Association for Debt Resolution, formerly known as the American Fair Credit Council, is an agency that regulates the debt relief industry. You can search its database for accredited members.

You can also search the Better Business Bureau website for complaints and the company's rating.

Also, your local bank or credit union may have a list of reputable debt relief companies and credit counselors.

Under most circumstances, bankruptcy does not dismiss student loans, personal loans, alimony, or child support debt. DNPs do not dismiss these debts either, but they can try to negotiate settlements of them. Also, DNP companies can't stop collection calls or give your financial situation a fresh start. Only filing for bankruptcy can do these things.

Common Claims and Risks

Some DNPs may claim to cut your total debt in half, but this may not be realistic for your financial situation. Upfront fees can be steep for a DNP, often topped with a final bill based on a percentage of supposedly saved debt.

A debt negotiation company may also claim its services will not negatively affect your credit score or ability to get future credit and lower interest rates. But, all too often, debt negotiation programs leave their customers with more debt, dealing with debt collection companies and the damaging effects of a poor credit score.

The debt settlement process takes time. Most creditors don't settle debts until they are several months overdue. This means many of the settlements come with strings attached:

  • Late fees
  • Higher interest rates
  • Delinquency notices
  • Reporting negative information to credit reporting agencies (resulting in an even lower credit rating)
  • Extra taxes. The amount of debt saved through debt negotiation becomes taxable income to the IRS

All these options could damage your credit. Also, not making your monthly payments could lead to lawsuits, wage garnishment, or liens placed on your home or other property by creditors.

You may also not be able to keep up with the payment plan. Depending on the amount of money you owe, saving enough for a lump sum payment can create more financial hardships.

Not all DNPs are shady, but understand what you're getting into if you choose this route. Legitimate DNP companies will negotiate with your creditors on your behalf and try to lower your debt, extend the time to pay back your creditors, or negotiate a helpful deal for you.

The Federal Trade Commission

The Federal Trade Commission (FTC) enforces consumer protection laws. The FTC covers any agency claiming to be a debt negotiation program.

According to the FTC, a DNP must:

  • Give full disclosure of DNP terms and financial conditions
  • Disclose all fees, services, potential risks, and benefits to customers, including consequences of stopping payments to creditors
  • Not collect fees before settling debts
  • Explain that your escrow payments are legally yours, as well as any interest earned on the account
  • Hold your escrow account with an entity separate from the DNP
  • Inform you that you may withdraw these funds at any time

Identify Red Flags for DNPs

A DNP that makes big promises may be a scam. Avoid debt negotiation programs that do any of the following:

  • Guarantee removal of all unsecured debt
  • Promise that unsecured debts can get paid off for a fraction ("pennies on the dollar") of the actual debt
  • State there are "new government programs" to get you out of debt
  • Claim that their program will save you from bankruptcy
  • Charge high monthly fees
  • Make promises before evaluating your financial situation
  • Ask you to stop all communication and stop making payments to creditors without explaining the serious consequences
  • Claim that creditors do not, or hardly ever, sue debtors for stopping monthly payments
  • Promise that there will be no negative impact on your credit score
  • Claim the ability to remove negative information from your credit report

Ensure you fully understand your contract's terms before signing up for a debt negotiation program. Consider checking with your state's attorney general, local consumer protection office, or the Better Business Bureau to ensure it is a valid company.

If you get scammed, report the company to the Federal Trade Commission, state attorney general, and local consumer protection office.

Trust your instincts. A program that sounds too good to be true is probably a scam. No matter your route, getting out of debt or becoming debt-free takes time.

Questions About Debt Negotiation? Consult an Attorney

Dealing with debt can be very stressful. But trustworthy people can help. If you have questions about debt negotiation and settlement, contact an experienced bankruptcy attorney. Some bankruptcy attorneys offer free initial consultations or charge an initial consultation fee which gets deducted from the fees if you hire them. They can offer valuable legal advice.

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