Learn what really matters when choosing a debt settlement company
Follow these recommendations for the best possible results in settling your past-due accounts.
There are several criteria you need to examine before choosing a settlement company. Let’s take a look at the important points of the settlement process and how settlement companies handle them:
- Method of Paying Settlements
- Fee Structure
- Proven Record of Happy Customers
- Rating With Better Business Bureau
- Free Consultation
How Settlements are Paid – Lump Sum or Payment Plan?
When choosing a debt settlement company, one of the first things you have to decide is whether you will pay your settlements in a lump sum, or use a monthly payment plan.
The best way is to pay your settlements is to be ready with lump sums. This gives you more freedom to pay your creditors off faster and negotiate lower settlements. If a creditor is ready to settle and an acceptable amount, you will be able to pay it.
Where do you get the settlement money? The usual places you can get these funds is a Home Equity Loan or Line of Credit (if you own your own home), a tax refund, gifts from relatives or cashed out investments.
A payment plan allows to settle your debt without having to have a large sum of money up front. You put a monthly payment into “trust account”, run by the settlement company. When you have saved up enough in your account, the settlement company will negotiate a settlement with your creditor. Then you start saving for the next settlement, and so on.
There is a risk with the payment plan. Your creditors may not want to wait for you to save the funds necessary, and may send your account to collections or to the courts. Some settlement companies offer loans, similar to a consolidation loan, to allow you to pay your debts in a lump sum, then pay them back on a monthly basis. Most of these payment plans last from 3 to 5 years, depending on how much you can afford per month.
There are usually 2 ways that a settlement company will charge for their services.
1) Based on the amount of debt you have or
2) Based on the amount of money they save you.
With both methods, the company will usually charge you an upfront fee, usually called a “retainer fee.” A good settlement company will put this toward your first settlement, while another may treat it as an “setup” or “administrative” fee.
In method 1, the company will usually take a fee of about 15-20% of your total debt you are trying to settle. If you decide to use a monthly payment plan, most of this fee is usually charged in the first three months, and then a portion of your monthly payment after that.
Unfortunately, this type of fee structure leaves you paying a lot up front and then waiting a long time to save up enough to settle your debt. Sometimes, it can bee too long and your creditor has already taken you to court. Often, a settlement company can shorten the saving period by doing “group settlements”, where they achieve a greater discount on your debt by lumping you with other clients who owe the same creditor.
It’s often a good idea to avoid companies that charge a large “upfront” fee. The better plan is to go with a reliable company that you pay on a contingency basis, as in method 2.
In a contingency-based payment plan, you only pay after the settlement agreement has been reached and you pay the settlement company a percentage of the amount of money that they have saved you. In this performance-based model, they have more incentive to get you a lower settlement. With method 1, there is no incentive, they get paid no matter how much of a discount you get.
Many companies will provide you with actual settlement letters like mine, to prove their success. A company with a good record will be able to provide you access to hundreds, if not thousands of these letters as proof.
Other companies offer testimonials, but those can be fabricated. Be wary of settlement companies that claim to guarantee settlements, because no company can. However, some will offer money back if they can’t settle a debt for you.
A good measure of proven success is the length of time that the company has been in business. Obviously, the longer the better and it’s a good measure of reliability. In general, those that have been around a while have been able to stay in business due their success and focus on customer satisfaction.
Better Business Bureau
Always check out the company’s BBB rating. This will give you a great deal of information about the company and a good feel for how they do business.
First, be sure the company is actually registered with the Better Business Bureau and has been in business for at least 5 years. You will be giving this company a lot of control over your financial life for a brief period of time, so be sure to do your homework in this area.
Also be sure to check the local BBB in the area where the settlement company is based. I had a settlement company ready to do business with me who claimed they had no complaints with the BBB. I double-checked through the local BBB and found they had 2 in the previous year. Any unresolved complaints in a BBB report should be a red flag and play heavily in your decision.
Look for a solid company that has little or no BBB complaints and who has been in business for a substantial amount of time.
Any company worth doing business will offer a free consultation. A reliable company will conduct and extended phone conversation with you to find out about your situation and needs.
Do not settle for anything less than a full conversation with a real human.
Ask as many questions as possible, like:
- “What percentage of your clients accounts actually settle?”
- “What is your client retention rate?”
- “How do your fees work? Upfront/Monthly or Contigency?”
- “Can I see some sample settlement letters?”
- “How long have you been in business?”
With the answers they provide, you will get a better feel as to how reliable the company will be. Watch out for a company that only relies on a web form and then asks you to sign up and pay the retainer fee.
If you use these tips and do your homework when choosing a settlement company, it will pay off in faster and smaller settlements. The sooner you start, the sooner you will have more money in your pocket and be on your way to being debt-free.