Debt settlement also known as debt arbitration and debt negotiation is an arrangement between you and your creditor where the creditor agrees to reduce the amount you owe. The recent credit crisis has fueled the growth of many debt settlement companies and many companies have also helped debtors to get out of debt. However, consumers have been complaining about the anomalies that have been taking place in the debt settlement industry.
To prevent irregularities from prevailing in the debt settlement industry, a state bill AB350 is waiting to be passed (as of July 12, 2009) in the state of California. The bill would regulate all the debt settlement companies in California. It would include all the debt settlement companies under Department of Corporations. These companies will need license to operate. The companies are also expected to disclose fees charged by them and important facts about their modus operandi. The bill is heading closer to acceptance and will come into effect not before January 2012.
Meanwhile should you opt for debt settlement? The answer is you have to if you have no other debt help option to get you out of debt. This is because many consumers are not being able to opt for credit counseling as they know that they will not be able to pay all their debts. And as per the new federal bankruptcy laws, not many consumers are qualifying for bankruptcy. As such there are many debtors who have no other option but to pursue debt settlement.
What is the common complaint against debt settlement companies? The majority of consumers have a common complaint and that is the high upfront fees these companies charge. And in majority of the cases it has been found out that these companies take the fees but fail to deliver what they promise.
Enrolling for a debt settlement program will reduce your outstanding balance by as much as half. How does it work? If you intend to get your debt settled with the help of a debt settlement company, the company will negotiate on your behalf with your creditor. A trust account is created and you don't make payments to the creditors. Instead you make payments to the trust account. When sufficient cash has accumulated in the account, the debt settlement company will start negotiating with your creditors to reduce the total amount of debt you owe.
Debt settlement companies usually charge fee that is 15% to 20% of the debt amount. This figure can be higher and you are required to pay the fees when you enter into the contract with the debt settlement company or in the initial months of the program. It takes approximately 3 years to complete the program. Instances of drop outs are not uncommon in a debt settlement program.
