October 2010
Settling Your Credit Card Debts
If you’ve maxed out your credit cards and But there is no guarantee that debt
are getting deeper in debt, chances are settlement companies can persuade a
you’re feeling overwhelmed. How are you credit card company to accept partial
ever going to pay down the debt? Now payment of a legitimate debt. Even if they
imagine hearing about a company that can, you must put aside
promises to reduce – or even erase – your
debt for pennies on the dollar. Sounds like
the answer to your problems, right?
The ederal Trade Commission (FTC),
Companies that sell
the nation’s consumer protection agency, debt settlement and
says slow down, and consider how you can other debt
get out of the red without spending a whole
lot of green. relief services by
phone cannot charge
Debt Settlement Companies Many
diffeent kinds of services claim to or collect a fee before
help people with debt problems. Among they settle or
them are “debt settlement” companies that
say they’ll negotiate with your creditors to
reduce your debt.
money for your creditors each month.
reduce the amount you owe. Some debt
Meanwhile, it may be months – or even
settlement companies claim that they can
years – before the debt settlement
arrange for your debt to be paid off for less
company negotiates with your credit card
than the amount ou owe – for anywhere
company to settle your debts. And, if you
from 30 to 70 percent of the balance. For
stop making your payments in the
example, if you owe $10,000 on a credit
meantime, the credit card company
card, a debt settlement company may claim
usually adds late fees and interest to the
it can arrange for you to pay off the debt for
debt each month. That can cause our
less, say $4,000.
original debt to double or triple.
FTC Facts For Consumers 3FTC Facts For Consumers 2
estimated dollar
Researching Companies If you decide to • the debt settlement company
pay a company to negotiate doesn’t split fees with the account
your debt, do some research before you administrator; and
choose one. Consider other people’s • you can stop working with the debt
experiences with debt settlement settlement company at any time without
companies. One way to do that is to enter paying a penalty. If you decide to end the
the company name with the word relationship with the company, it must
“complaints” into an Internet search engine. return the money in the account to you
Read what others have said. You are within seven business days – minus any
making a big decision to spend money that fees the company legitimately earned.
could go toward paying down your debt.
Disclosure Requirements The debt
Debt Settlement Fees Companies that settlement company must gie
sell debt settlement and
you information about the program before
other debt relief services by phone cannot you enroll:
charge or collect a fee before they settle or
reduce your debt. • Fees and terms. Before you sign up
If you do business with a debt settlement for the service, the company must explain
company, you may be required to deposit its fees. If the company charges a specific
money for the company’s fees and potential dollar amount for services, it must tell you
settlements in a dedicated bank account, what it is. The company can charge ou only
which will be administered by an a portion of its full fee for each debt it
independent third party called an account settles. For example, say you owe money
administrator. The account administrator to fie creditors. The company successfully
may charge you a reasonable fee, and is negotiates a settlement with one of your
responsible for transferring funds from your creditors. The company can charge you
account to pay your creditors and the debt only a portion of its full fee at this time
settlement company when settlements occur because it still needs to successfully
– as long as: negotiate with four other creditors. Each
time the debt settlement company
• the account is at an insured financial successfully settles a debt with one of your
institution • you own and control the creditors, the company can charge you
funds (and any another portion of its full fee.
interest accrued), and can withdraw
them at any time;
• the debt settlement company doesn’t
own, control or have any affiliation with If the company’s fees are based on a
the count administrator; percentage of the amount you save
through the settlement, it must tell you
both the percentage it charges and the
Tax Consequences Depending on your financial
condition,
the money you save by using debt settlement
companies can be considered taxable income. Credit
card companies and others may report debt
settlements to the IRS, and the agency may consider
it income, unless it finds ou are “insolvent.” You are
insolvent when your total debts are more than the fair
market value of your total assets. It can be
complicated to determine whether someone is
insolvent. If you’re not sure whether you qualify for
this exception, talk to a tax professional.
Red Flags
Avoid doing business with any company that
promises to settle your debt if the company:
• charges any fees before it settles your
debts
• touts a “new government program” to bail out
personal credit card debt
• guarantees it can make your unsecured
debt go away
• tells you to stop communicating with your
creditors
• tells you it can stop all debt collection calls
and lawsuits
• guarantees that your unsecured debts can be
paid off for just pennies on the dolla
FTC Facts For Consumers 5FTC Facts For Consumers 4
Tha’s the organization within the U.S.
Department of Justice that supervises
bankruptcy cases and trustees. If a cre
Other Options Working with a debt A new law requires credit card issuers to counseling organization says it’s
settlement company is include a toll-free number on their government-approved, check the U.S.
statements that directs cardholders to Trustee’s list of approved organizations
just one option for dealing with your debt.
information about finding nonpofit be sure.
You also could: negotiate directly with
your credit card company, work with a counseling organizations.
credit counselor, or consider bankruptcy.
• Talk with your credit card company,
even if you have been turned down before.
A new law requires
Rather than pay a company to talk to your credit card issuers to
creditor on your behalf, remember that you include a toll-free
can do it yourself for free. You can find the
telephone number on your card or your number on their
statement. Be persistent. Keep good statements that directs
records of your debts, so that when you do
reach the credit card company, you can cardholders to
explain your situation. Your goal is to work information about
out a modified payment plan that reduces finding nonpofit
your payments to a level you can manage.
If you don’t pay on your debt for 180
counseling
days, your creditor will write your debt off organizations.
as a loss; your credit score will take a
big hit, and you still will owe the debt.
Creditors often are willing to negotiate
with you even after they write your debt Most credit counselors offer sevices
off as a loss through local offices, thenternet, or by
• Contact a credit counselor. Reputable telephone. Look for an organization that
credit counseling organizations advise offers in person, face-to-face
people on how to manage money, bills and counseling. Many universities, military
debts; help them develop budgets; and bases, credit unions, housing
usually offer free information and authorities, and branches of the U.S.
workshops. They should discuss your Cooperative Extension Service operate
entire financial situation with you, and help nonprofit cedit counseling programs.
you develop a personalized plan to get you The federal government maintains a list
out of debt. of government-approved organizations,
by state, at www.usdoj.gov/ust, the
website of the U.S. Trustee Program.
For More Information The FC has free materials
about dealing with
credit card debt at ftc.gov/credit: • Knee
Deep in Debt • Fiscal Fitness: Choosing
a Credit
Counselor • Before You File for Personal
Bankruptcy:
Information About Credit Counseling and
Debtor Education
• ftc.gov/moneymatters
For more information about dealing with
mortgage debt, visit ftc.gov/yourhome.
• Mortgage Payments Sending You
Reeling? Here’s What to Do
• Foreclosure Rescue Scams: Another
Potential Stress for Homeowners in Distress
6
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