- Consumer debt is spiraling out of control in many of the developed countries of the world.
- U.S. consumer debt reached $2.3 trillion or $7,856 per American as of July, 2008.
- The average Briton owes 3,175 pounds ($6,040) with the United Kingdom leading the European Union in consumer debt.
- In Spain consumer indebtedness is increasing at a rate of 10% per year.
Debt arbitration, also known as debt negotiation or debt settlement is one way people use to resolve their money difficulties. The debt arbitration process consists of negotiating a lump sum payment amount, typically at a considerable discount from the amount you owe. It can be an efficient way to payoff your debts and move on with your life, without declaring bankruptcy which has recently become more difficult. (See below.) You can do this by yourself or by hiring a debt arbitration/negotiation company to negotiate on your behalf. Most companies claim, and there is anecdotal evidence to support the claim, that they can decrease your indebtedness (the amount you must payoff) by 50%.
You may be wondering why your creditors would be willing to agree to reduce your debt balance in return for payment. Because they fear the alternative will be bankruptcy in which they won't get anything. Current studies estimate that the number of bankruptcies filed yearly for "current debt," is as high as 30%. Your creditors would prefer to get something rather than nothing. Most will agree to take a smaller monthly payment and stop all or most accruing interest and fees.
What Debt Arbitration is Not
Debt arbitration is not credit card counseling. Debt arbitrators are independents who work directly for you. Credit card counselors can help you change your spending habits and create long term goals for repairing your credit and managing your debt. Debt arbitrators negotiate your indebtedness with your creditors. Debt negotiators can also help you with all of your indebtedness, whether it is medical bills, loans, mortgages, credit cards or some other source.
Don't confuse debt arbitration and settlement, with binding, mandatory arbitration, the process currently written into most consumer loan contracts which is currently under attack by Congress and various consumer groups. Debt arbitration and settlement providers negotiate directly with your creditors so that you never get to a judge or arbitrator.
Should You Consider Debt Arbitration and Settlement
If you are feeling overwhelmed by your situation or are having trouble meeting your monthly minimum payments, you may want to talk to a service to see what they can do for you. Other factors include:
- Have difficulty in meeting your basic monthly financial obligations.
- Have multiple creditors applying pressure because you can't meet your payments.
- Substantial amount of debt, say over $10,000.
- Your debt situation includes tax complications or ramifications that may need expert advice.
Benefits of Debt Arbitration and Settlement
- Assemble all your debt into a single payment, alleviating the worry of keeping track of multiple payments.
- Give you breathing the process usually takes 4 to 10 months
- Give you keep more control over the process than with any alternative.
- Light at the end of the tunnel. The payment period usually last between 3 to 5 years but can be less.
- Maintain your privacy. None of this becomes a matter of public record that can come back to haunt later.
- Provide you with a plan to reduce your debts.
- Pursue a strategy that optimizes the end result in your favor.
- Put an end to those uncomfortable, creditor phone calls, as long as you are paying every month and on time.
- Reduce both the monthly payment amount and the applicable interest rate.
- Relieve you of the stress of the negotiation process.
- Save thousands of dollars.
Debt Arbitration and Settlement Negotiating Strategy
Keep in mind that in this process, patience and persistence pays off. Debt arbitrators typically negotiate your debts one at a time, starting with your largest debt.
What the creditor offers will be based on your credit score, your payment history and your total debt amount. Thus, when the debt arbitrator negotiates with the second largest, the largest debt will be off credit report, giving you a better credit score leading to a better offer. As you move forward with this strategy, your negotiating position continually improves. So taking your time can save you money.
If you have the intestinal fortitude you can do this for yourself. However, most of us don't. Most people grab the first offer their creditor makes just to get it over with. Also you are not likely to know all the ramifications, like those to your credit report (below) and might be blindsided.
How you pay your debt is part of both your credit report and credit score. Be aware that both will take a hit when you engage in debt arbitration. But this is less of a hit, and not nearly as permanent a hit as not paying or bankruptcy. Since you can't have both an A+ credit rating and be free of debt, you need to decide which is most important to you.
Typically creditors report these kind of arrangements to reporting services as "Paid Charge Off," or R-9's. These stay on your credit report for 7 years and will cause you problems. Make sure that one of the following will be reported instead to the credit services by your creditors or that the creditor will remove any R-9's as part of the final agreement.
Paid on your credit report means that the indebtedness was paid through a settlement.
Paid as Agreed means that you fulfilled your contract to pay your creditor.
Satisfied in Full on your credit report is the least likely to lower your credit score or create future harm.
Defaulted is what you want to avoid on your credit report.
Selecting the Right Champion
You really need to do your homework before signing up. Here are some things to do:
- Ask about the process they use and continue asking questions until you understand it.
- Ask for references and check them.
- Check with the
Better Business Bureau
- Find out if they are accredited and by whom. N.Y. is the only state that requires debt arbitrators to be licensed. The industry depends on private associations to certify and provide ethical standards for practitioners.
TASC, The Association of Settlement Companies,
accreditation seems to be the way to go.
- Find out about debt arbitrator certification by
IAPDA, International Association of Professional Debt Arbitrators,
- Find out if they offer a service guarantee and what it is. Ethical practitioners will refund part, or all, of your fee if they cannot settle your debt.
- Find out if you can cancel your account and get a refund if you decide not to go forward. Many companies will refund what you have paid, less the administrative and monthly service fees.
- Find out their rates. You want to ensure that you can afford the program and that your monthly payments will be realistic within your budget.
- Read the testimonials on their websites.
In October, 2005 a new bankruptcy law was enacted nationwide that provides less protection to consumers seeking a new start. In the good old days, 70% of people who filed for personal bankruptcy were granted Chapter 7 status which completely eliminated their unsecured loans. Under the new law, if your income is above your state median, or you can pay at least $100 a month toward your debts, you will be turned down for Chapter 7 and redirected to Chapter 13, where you will be required to pay back a portion of the debt over 5 years.
To calculate your allowable living expense, and, thus, the amount you can pay your creditors, the court will use IRS schedules, not your actual, documented expenses. So the judge may think you can pay back a lot more than you think you can. This leads to a harsh 5 year plan on a court mandated budget that will force you to adopt a much lower standard of living. When you consider this, debt arbitration and settlement begins to look much more appealing.
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Thanks for adding a link!