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Chapter 4: Credit Card Debt Services

Credit Repair Organizations (CROs) scroll down

Credit Card Debt Negotiation or Settlement

Debt negotiation and debt settlement are essentially the same thing. You sign an agreement with an organization providing debt settlement/negotiation services. You do not make your monthly credit card payments.  Those monthly payments go to the settlement firm. Your money is NOT disbursed to your credit card accounts. Instead, your money accumulates to enable a negotiation or settlement for 50-70 percent of the debt (more or less depending on the claims of individual settlement firms) once there are “sufficient” funds to begin negotiating less-than-full-value, lump-sum, paid-in-full payments. The debt settlement firm’s fees come out of your accumulated funds before any creditors are paid.

The simple fact is the math just does not work when you have to pay for debt settlement.  So you stop making monthly payments to bank funds to enable you to negotiate a reduced balance by offering a lump sum payment. 

As a debt settlement strategy that makes sense.  However, if you are paying for debt settlement, that makes no sense because the debt settlement firm’s fee, which is typically in the thousands of dollars, comes out of your settlement fund.

To look at it another way, the best time to negotiate a reduced balance lump sum payment is about six months after you stop making payments.  That is when the credit card bank is about to charge off your account and sell it for pennies on the dollar. If you account balance is $12,000, and you have saved $6000, you might be able to get the bank to take the $6K as payment in full.
But, if you are with a debt settlement firm, $1500 - $2500 needs to first come out of your settlement fund for settlement “fees.”  Is the bank then going to settle for $3000?

These firms dominate radio advertising and bombard email with tempting phrases like;
“This is an urgent message for people with extremely large credit card debt.  You must act quickly. This life changing information is available for free today.”  Or there is something like this; “Call and learn a secret the credit card companies do not want you to know – How to settle your debt for less than you owe.”  If you call, the first question you are asked is how large is your credit-card debt.  If you debt is large, then they can charge a large fee. When you call, you talk to sales people who emphasize their experience and connections with the credit card companies and who may promise whatever percentage of settlement they have to get your upfront fee. 

 If you are convinced to use one of these firms for credit card debt relief, your success will depend on how quickly your money accumulates, which depends on how quickly you can pay it in. It will also depend on your level of debt.

As I have pointed out, a lot can wrong with this strategy. There are a lot of internet scams. Beyond those, even the "reputable" firms can deplete your accumulated funds with excessive fees for negotiating your accounts. In addition to their fees, they can negotiate a 40 percent settlement figure and tell you it is 60 percent, pocketing the 20 percent difference. Some credit card companies will not settle, and their late fees and high interest accrue in your name. Other credit card banks may settle but not agree to list your account favorably with the credit reporting agencies. Or, the debt settlement firm may not even bother with attempting to negotiate favorable reporting to your credit files. The worst that can happen is your debt settlement firm simply goes out of business, and your accumulated funds disappear.

To succeed with fee-paid debt settlement, don’t fall for a debt settlement firm’s sale pitch, use an attorney specialized in this area. Evaluate debt settlement law firms for;

• their fees;
• how they will escrow funds and account for them;
• how they will look out for your credit rating;
• how they document their activity with your credit card banks;
• and how your funds will be protected and returned to you if they stop functioning.

Credit Repair Organizations (CROs)

According to many sources, this type of organization is prone to scamming consumers with the usual debt service motto, “Let us (professionals) handle your credit repair for you.”  And to that, CROs add, “you don’t have time, let us do it for you.” CROs front-end load their fees, so you pay before you see any results.
It is generally accepted that any consumer can do a better job of credit repair on their own today, than credit repair organization can do for them.
Due to a high level of fraud and phony guarantees, CROs were regulated by the federal Credit Repair Organization Act in 1996.
CROs got started and grew for the same reason debt collectors and debt service firms grew; opportunity brought on by the significant increase in consumer debt over the past decades.  Steve Baker, Director of the Federal Trade Commission in Chicago, said in the past four years (from April 2003) the FTC had not seen a legitimate credit repair clinic.  You can read Baker’s other comments and some danger signals to note when dealing with CROs at bankrate.com. http://www.bankrate.com/brm/news/cc/20011008a.asp.

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