Playing Hardball

If you don’t feel comfortable negotiating with creditors yourself but you want to take a harder position with them, you can use a debt negotiation firm. These companies are not the same as credit counseling agencies, though there is negotiation involved in the creation of many debt repayment plans.

Debt negotiation companies often claim that they can save you a bundle by getting your creditors to accept less than you owe—often from 10 to 50 percent of your balance. But there are a lot of sharks in the debt negotiation market; so, many states keep close tabs on these companies, regulating the services they offer and how they advertise.

Like a credit counseling agency, a debt negotiation company will tell you to stop paying your creditors directly and instead send payments to it, which will pay creditors for you. Unlike a counseling agency, a debt negotiating firm will usually take an antagonistic stance in dealing with credit card companies.

Some debt negotiation companies promote their services as an alternative to bankruptcy and a better move as far as your credit rating is concerned. Others claim that any negative information added to your credit report can be removed when you have completed the debt negotiation process. This is true in some cases—but it’s not a certainty.

In fact, many debt negotiators will advise you to stop making payments on your nonsecured debt for a period of time before they approach the creditors. The idea is that it will make the credit card companies believe that you’re going to go bankrupt—and they’ll get nothing. It’s a hardball negotiating tactic that can devastate your credit.

If you stop making your monthly payments, you’ll be racking up late fees and, soon enough, finance charges computed at hefty penalty interest rates. If you go over your credit limit in the process, even more charges and penalties will be assessed.

Plus, your creditors will be reporting your accounts as delinquent, further affecting your credit score.

Meanwhile, the debt negotiation firm has been charging you lots of fees, too.

Even if the debt negotiation company performs as promised, you still may wind up in worse shape, financially, than you started out, with a badly battered credit report on top of it.

Then, to make matters worse, you may owe the Internal Revenue Service money. Forgiven debt can be considered taxable income.

Just as you should do due diligence to check out the validity of a credit counseling agency, you also should contact your state Attorney General or the Better Business Bureau to check out any debt negotiation company with whom you might work.

Next: Conclusion