Debt Negotiation Programs
By FindLaw Staff | Legally reviewed by Bridget Molitor, J.D. | Last reviewed April 16, 2021
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Debt negotiation programs (DNPs) are offered as last-ditch efforts to get out of debt. These programs are also called "debt settlement companies" or "debt settlement programs." DNPs often are set up as nonprofits (though some state laws have tightened requirements for debt service companies).
These programs are not the same as credit counseling, debt consolidation, debt relief companies, or debt management plans (DMPs).
Some DNPs are legitimate and valuable for things like credit card debt or overdue medical bills. But, many of them can be risky and harm your credit rating.
Debt Negotiation Programs Claim To Cut Your Total Debt
Debt negotiation organizations claim to be able to cut a consumer's original debt in half through negotiations with the creditors or lenders. They will tell you they negotiated a settlement offer with your creditors. Fees can be quite steep for a DNP, often topped off with a final bill based on a percentage of debt supposedly saved.
Keep in mind nothing, including bankruptcy, can dismiss your student loans, personal loans, or child support debt. DNP companies can't stop collection calls, create a debt repayment plan, or give your financial situation a fresh start. Only filing for bankruptcy can do these things.
Debt Negotiation: Other Common Claims and Risks
Most debt companies claim their services will not have a negative impact on:
- Your credit score
- Your ability to get future credit (and decent interest rates)
But all too often, debt negotiation programs leave their customers with additional debt or the harmful effects of a poor credit profile.
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)
- Additional taxes (the amount of debt saved through debt negotiation becomes taxable income)
All of these options could damage your credit. Also, not making your monthly payments could lead to lawsuits, wage garnishment, or liens put on your home/other property by creditors.
Not all DNPs are shady, but you need to understand what you're getting into if you go this route. The DNP companies that are legitimate will negotiate with your credits on your behalf and try to lower your overall debt, extend the time to pay them back, or try to negotiate a helpful deal for you.
State Laws and the UDMSA
Many states have passed laws regulating DNPs to varying degrees, while some of them have adopted the Uniform Debt-Management Services Act (UDMSA).
The UDMSA includes, but is not limited to, the following rules. DNPs must:
- Register as a consumer debt-management service
- Provide full disclosure of DNP terms and financial conditions
- Hold an insurance policy against fraud and theft
- Have annual renewal requirements for customers
- Disclose all fees, services, potential risks, and benefits to customers
- Provide credit counseling services by either a certified credit counselor or a certified debt specialist (different states may use different titles) before entering into a DNP contract
- Allow customers a three-day right of rescission (grace period for canceling the contract)
- Keep payments earmarked for creditors in a trust account
How To Identify Red Flags for DNPs
Debt negotiation programs that do any of the following should be avoided at all costs:
- Guarantee removal of all unsecured debt
- Promise that unsecured debts can be paid off for a tiny fraction ("pennies on the dollar") of the actual debt
- Claim that their program will save you from filing for bankruptcy
- Charge high monthly fees
- Charge for a percentage of your (supposed) debt savings
- Ask you to cease all communication and stop making payments to creditors
- Claim that creditors do not (or hardly ever) sue debtors for stoppage of monthly payments
- Promise that your credit rating will not be negatively impacted
- Claim the ability to remove negative information from your credit report
Make sure you fully understand the terms of your contract before signing onto a debt negotiation program. Consider checking it out with your state's Attorney General to be sure it is a valid company.
Additional Questions About Debt Negotiation?
Dealing with debts can be very stressful, but there are people out there who can help. If you have questions about debt negotiation and settlement, it's a good idea to contact an experienced bankruptcy lawyer in your area.