Settling credit card debts – Part 2
Understand all the fees you will pay if you work with a debt-settlement company.
The Federal Trade Commission (FTC), the nation’s consumer protection agency, says slow down, and consider how you can get out of the red without spending a whole lot of green.
Debt settlement fees
Companies that sell debt settlement and other debt relief services by phone cannot charge or collect a fee before they settle or reduce your debt.
If you do business with a debt-settlement company, you may be required to deposit money for the company’s fees and potential settlements in a dedicated bank account, which will be administered by an independent third party called an “account administrator.” The account administrator may charge you a reasonable fee and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur – as long as:
- The account is at an insured financial institutiono
- You own and control the funds (and any interest accrued), and can withdraw them at any time
The debt-settlement company doesn’t own, control or have any affiliation with the account administrator, nor does it split fees with the account administrator. You can stop working with the debt settlement company at any time without paying a penalty. If you decide to end the relationship with the company, it must return the money in the account to you within seven business days – minus any fees the company legitimately earned.
The debt-settlement company must give you information about the program before you enroll:
- Fees and terms. Before you sign up for the service, the company must explain its fees. If the company charges a specific dollar amount for services, it must tell you what it is. The company can charge you only a portion of its full fee for each debt it settles.
If the company’s fees are based on a percentage of the amount you save through the settlement, it must tell you both the percentage it charges and the estimated dollar amount that it represents. This may be called a “contingency” fee.
If the company has a refund policy, it must tell you the terms and conditions for getting a refund. If the company has a no-refund policy, it must tell you so before you enroll.
- Results. The company must tell you how many months or years it will be before the company will make an offer to each creditor.
- Offers. The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.
- Non-payment. If the company asks you to stop making payments to your creditors – or if the program relies on you not to make payments – the company must tell you about the possible negative consequences of doing so, including: damage to your credit report and credit score, your creditors may sue you or continue with the collections process, and your credit card companies may charge you additional fees and interest, which will increase the amount you owe.
See part one of this article series for more helpful information: “Settling credit card debts – Part 1.”