Americans are in debt. It has been this way for a number of years, and even though things got slightly better after the great recession (almost a decade ago now), the U.S. population picked up their old spending habits quickly. The result is that as of 2015, the average household owes a little over $7,000 on their credit cards (if you exclude those who never carry a balance, then that number jumps to $15,609). That doesn't even include all the other debts that Americans carry, like mortgages, student loans, auto loans, and more. Throw those into the mix and the total consumer debt in the U.S. jumps to over $11.3 trillion. It's no wonder that the debt settlement industry is a booming business.
If you owe more than you can handle, then you have a few options. The last on the list should be bankruptcy. One of your first steps is to work out a deal with your creditors. But you might need to get help from a debt settlement company first. Before you contact them, however, read this article from the CFPB, and then be prepared to ask the company these six questions.
6 Questions to Ask a Debt Settlement Company
What do you charge?
The FTC debt relief rules from 2010 make it illegal for a debt settlement company to collect fees until after the debt is settled. But be aware that some companies will try to skirt these rules. They may call them "maintenance fees" or perhaps "legal fees" or something else. These are fraudulent ways of charging fees before the work is done. The only fees you should pay before settlement are small fees for holding your money in escrow.
How long will this take?
If the settlement company gives you an exact time period, then beware. Depending on your debt, your creditors, and a host of other factors, your settlement may take awhile. A good company that has been in business for a while will be able to give you an estimate, but an exact time period is a red flag that the company doesn't really know what they're doing.
What will my tax consequences be?
What you're looking for here is a company that says there won't be consequences. If you hear that, then find a different company. The IRS counts forgiven debt as taxable income. So if a debt settlement company gets you out of thousands of dollars of debt, it will be as though you earned that money and there will be tax consequences. Your accountant can help you figure what those consequences actually will be.
How will this affect my credit?
Again you are looking for a company that downplays the consequences of debt settlement. A good company will be upfront and transparent. If you hear that it won't affect your credit at all, then you should find a different company. Debt settlement has a negative impact on your credit. There is no way around it.
Where is my money during settlement?
When you're in debt, you are paying a small amount to your creditors each month. When you use a debt settlement company, you pay the money into an escrow account while the company deals with your creditors in order to reach a deal to pay off your debt. This escrow account should be 100 percent in your control. Because the money is in escrow, it means you're missing payments on your bills (hence the negative impact on your credit score).
How much will you save me?
If a company gives you a specific answer, then they likely don't know what they're doing and you should find a different company. There is no way of knowing what you will save until negotiations are done. In addition, there is a chance that you won't save anything at all (read through that CFPB article). Your goal is to save money, which is why you shouldn't pay anything until the debt is settled and you know what you will be saving.
Should You Use a Debt Settlement Company?
In many cases, debt settlement isn't necessary. Instead, what you will want is debt counseling or debt consolidation. It won't pay off your bills, but you won't have the negative credit impact, either. If you have explored all options, and debt settlement is truly the only option, you can do the settlement yourself. Call your creditors and negotiate a deal where you have reduced interest rates, extended payment plans, lowered payments, or lowered principal owed. Many companies are willing to work with you, and all you have to do is call. If you can't do it yourself, then a settlement company may be your only option.