Debt settlement might seem like an easy out, but there are many risks involved. Learn what to watch out for by reading part one of this post, What You Should Know Before Settling Your Credit Card Debt. If you’re considering hiring the services of a debt settlement company, get as much information as possible about the process. Before you sign on the dotted line, here’s a list of the top 10 questions you should ask.
1. What are your fees?
Most of the fees should be based upon performance and results. Many companies charge a flat fee based upon a percentage of your debt amount. Their fees are collected in the beginning months of the program, even if no settlements are completed. If fees are based upon a percentage of the debt and not tied to results, this is a big red flag.
2. How long have you been in the debt settlement business and how much debt have you settled?
Many companies don’t settle much debt at all, and young companies have very little experience. If the company cannot demonstrate experience, this is another red flag.
3. Can you stop my creditors from calling me?
It is not possible to stop all creditor calls. If they say they can, beware.
4. Will you be making monthly payments to my creditors?
Settlement companies do not make monthly payments to your creditors. They should not claim to do so or give you the impression that they do.
5. Can I get sued?
Yes, there is a possibility that you could get sued. Don’t believe it if the settlement company acts like it can’t happen to you.
6. Will this have a negative effect on my credit report?
The correct answer to this question is “Yes.” Settled debt will have a negative impact on your credit report.
7. When can I expect my first settlement?
Your first settlement should be made well within the first 12 months of your program. If it takes any longer than 12 months, this is an indication that your settlement is not being handled correctly.
8. Can you tell me exactly how long this will take and exactly how much this will cost?
Debt settlement is not an exact science and there are too many variables to come up with exact time frames and figures. Many companies will tell you anything to get you in the door. They should not make any attempt to provide exact information.
9. Are there tax consequences I should be made aware of?
Yes. The IRS considers forgiven debt to be taxable income, though you may be able to get the taxes waived if you can show the IRS you are insolvent. This should be explained.
10. Who is holding my money while I’m waiting on a settlement?
Your funds should be held at a third party escrow company in an FDIC-insured trust account. The company should not tell you to send the funds you are saving for the settlement to them.
Sheiresa Ngo is the consumer affairs editor at Black Enterprise.