This is an answer to a couple of emails received about two unrelated issues:

#1 Setup Fees

Setup fees are not unusual, however, they should not be excessive and should never be equal too or more then the monthly payment that is agreed upon between you and the debt settlement company.

Remember, there are a number of firms that do not have such a fee and in almost all cases those are the more reputable firms available. The best firms to deal with are the ones that do not ask for such a fee,  rather then the ones that rope you in by agreeing to “waive” such a fee in order to get your account.

#2 Another point that is often overlooked is how your credit report reflects your settlement. Many people who try to negotiate with the lender feel that they are successful simply because they have reduced the total amount the creditor is willing to settle for. The problem with not using an appropriate “attorney referral” which is provided by a good debt settlement firm is also multi-faceted. I’ll just cover the two most critical.

1: Self-settlement usually requires payment terms that are almost impossible to meet.

2: The manner in which the end result is listed on your credit report cannot be accomplished when an individual account holder is dealing with lower level creditor employees. The attorney that professionally deals with these accounts is negotiating with banking departments which are unavailable to the consumer.

Bottom line, it’s always best to use a professional for debt settlement.

Everyone seems to be familiar with debt settlement as a logical means of eliminating your credit card and other unsecured debt.  It’s important to keep in mind that any firm that doesn’t stress “debt validation” as an integral part of their service is in all likelihood going to cost you more money.

The first step in a properly handled debt settlement is debt validation.  This process is extremely complex and should be handled by someone that is very well versed in consumer credit laws and regulations.  If you are dealing with a reputable firm, this process should be included in the monthly fee.  Debt settlement and debt validation is best done by an attorney that specializes in this area. 

Although it is very common to hear about people that have settled their debts on their own, in almost all cases, they usually pay significantly more then if they had employed the services of a qualified debt settlement network which would have provided them with appropriate legal representation.  It is their ability to exercise the necessary resources to properly validate the debt that would more then make up for any money that they may have thought they were saving by attempting the settlement process on their own.

There are a lot of people that get so frustrated with their credit card bills that common sense can easily go out the window.  The idea of taking out a home equity loan to repay the out of control credit card bills is a good example of frustration leading to bad decisions.  In this case, it’s probably the worst decision that you could make, and it stems not just from frustation, but also from a basic lack of understanding of the kinds of debt that people incur.

When it comes to consumer debt, there are basically two types of debt. Secured and unsecured.  To understand the difference, you only need to know that secured debt involves some type of collateral, such as your home, car, boat, or any type of real property.  In other words, if you default on this type of debt, something can be taken from you.

Credit card debt is unsecured debt.  If you default on a credit card balance, nothing can be taken from you.  In other words, nothing “secures” credit card debt.  When you go to the store and purchase your flat-panel TV on your Visa, Mastercard or Discover, the merchant is paid by the bank.  You are responsible to the bank and not the store to repay the debt.

If you decide to repay your credit cards using a home equity loan, you take a bad situation and make it far worse.  If you are falling behind on your credit card balances, you will damage your credit score.  In most cases, people that use or consider a home equity loan to resolve credit card problems already have less then good credit scores.  Taking out the loan will only add to your debt-to-income ratio, thereby worsening your score. The larger problem is often not realized until it may be too late.

By paying off your credit cards with a home equity loan, you have turned unsecured debt into secure debt.  Simply stated, defaulting on your credit cards will damage your credit and credit can always be restored.  If you default on the loan you took out to repay your credit cards, you can lose your home!  Unlike credit, homes are not easily rebuilt.

It’s unfortunate, but there are very few Debt Settlement firms that really use the legal resources that they claim to have available.  In the vast majority of cases, a letter from an attorney is generated to your creditors indicating that your account is now in the process of being settled through a negotiated settlement.  The things that they should do but don’t are critical to the debt settlement process.

An attorney should deliver to your creditors a letter of representation.  This representation should indicate that any and all correspondence concerning a particular debt should be directed to the attorney’s office.  Secondly, the attorney should then go about the process of “validating” the debt.  In other words, this is the process of making certain that the amount being stated as owed, is true, accurate, and not combined with any other fee or penalty which is not part of the debt.

In addition, when dealing with a Debt Settlement firm, you should have direct contact with the attorney during the course of the repayment program.  Most often, the attorney is not a part of the firm that you initially contacted.  Your payments should be made to the attorney or attorney’s payment processor and not to the Debt Settlement firm.  The Debt Settlement firm receives a monthly processing fee, and this fee should be built into the total montly payment.

You may want to know how your credit score is calculated.  The process is long and each of the three major companies in the United States will participate in reporting credit scores and histories with a different method.  This is why your credit score is going to be a little bit different from one to the next.  There are some factors that you can take into consideration if you want to estimate your credit score on your own.

The first thing is if you have not ever owned a credit card or had any type of bill in your name or if you have borrowed money of any kind, your credit score is going to be zero. Even though this is not considered to be bad credit, it is as hard to get a loan with no credit as it is with bad credit.  There are some companies that may be willing to take a chance on someone with no credit but it is much better to build up your credit little by little as you go by having cards in your name and living a comfortable and stable life within your means of income.

Your credit history is going to make up about 35% of your total credit score and it is very important.  The bills that are not paid or if you have debts that have defaulted you will hurt your credit score for 7 to 10 years before they are all erased. You need to think about this and all of the bad choices that you make today can hurt your credit in the future.  If you are repaying these debts now, chances are they will still show up on your credit report now as bills that were paid late.  There is 15% that is going to be the length of your credit history.  It is a good idea to start building credit as soon as you can. Your score will improve as time goes on as long as you are maintaining a bank account.  The information like length of employment or residence so that it can be classified in this section so if you have a regular and stable life, you will have a better score than someone else that moves around all the time.

Then 30% of your score will depend on what you are currently owing to creditors.  Even if you are not late on paying your bills, if you have many loans out at one time, it may be possible that you are denied to have another.  Therefore it is important to only take out the loans you really need and to repay them on time or early if you can.  If you pay off your loans early, you will not only see your credit score rise, you will also save money on paying interest.  This will show up on your credit history.  You will also want to try and keep your money in one place if possible.  10% of your credit score is going to be based on new accounts.  They will look at how many different types of loans you have applied for and how many you have open now.  When you are opening and closing accounts too fast is not a recommendation.

You need to use your common sense.  Know your credit score and how it is calculated is going to help you find mistakes on it.  This may help you and your credit score in the future.  You are able to see a free copy of your credit report annually for free so you should review this as well as get your credit score to be sure that you are being treated fairly.

Of all available options, if you are fortunate enough to qualify, debt settlement is perhaps the best available remedy for a great deal of reasons. As good as a choice as it is, there are many things that you should be aware of before making a committment to any debt settlement service.  First and foremost, you should be sure that you have legal representation available to you throughout the process. That is to say, as long as you are in a debt settlement program, legal assistance should be available to you.

Debt settlement is a process in which an organization will go to your lenders and negotiate with them regarding your debt. The purpose of the whole exercise is to reduce your debt burden. If a settlement company is good it can get your debt reduced by as much as 50% although the average is 45%.  This is what a creditor needs and this is the most visible benefit of debt settlement. The amount of the debt is reduced, the repayment plan is made easy and often the monthly installments are spread over a long period. This makes life a lot more easier for the borrower.

However, not all Debt Settlement Firms are created equal! Here are some things to be on the lookout for when shopping around for the best firm to deal with.

Upfront or Account Set-up Fees

Just about all debt settlement firms have a monthly service or processing fee. This is, afterall, the cost of doing business. However, an excessive fee generally indicates that you are dealing with a firm that has low expectations of the success of the clients they are servicing.  In other words, their approach is to make their money from abusive monthly service fees and not from the long term benefits they should be providing their clients. A fee over $25.00 per month should be viewed as a red flag for any firm you may be speaking with about their service.

What Information Are You Being Asked For?

When you are first discussing your situation with a debt settlement firm, you should not have to supply any detailed information in order for them to evaluate your situation. Beware of any firm that asks for your Social Security number, credit card account numbers or any other vital information.  Although there will come a time when you will need to provide this information, it is totally unnecessary at the beginning stages or in order for you to recieve a quote for the services rendered.

Who Is Calling Who?

One of the most common stories I’ve read on various blogs and forums about debt consolidation and debt settlement firms is that once a person has been enrolled in the program, they never can seem to get them on the phone again.  The most common thought is perhaps they’ve gone out of business, and yet, your money still comes out of your account every month. 

This is easy enough to avoid.  If you find that every time you try to reach the company you’re thinking about working with, you are leaving a voice mail and getting a return call this could be cause for concern.  Although the advisors at these firms do spend the better part of the day on the phone and leaving messages and getting return calls is a common practice, there should be at least a few times that you can reach the person you’re working with on the first attempt.  Even if it’s only ONE time in the course of making your decision, that is enough to let you know that calls aren’t screened to avoid unhappy clients.

Debt consolidation is probably the “grandaddy” of helping the consumer resolve out of control balances and interest rates.  Over the years, the industry has undergone many changes, but unfortunately not all changes have been for the better.  Debt consolidation is a process that proposes to bring your debt under control by providing the credit card holder with lower interest rates.  Before signing on to a debt consolidation program it is important to note that the lower interest rates are usually offset by unregulated monthly service fees.

In addition, generally speaking, the number of years it takes to repay the creditors is no more then or less then if you were to cancel the accounts of your own accord and devise your own repayment program.  The fact is that every  bank will give you the option to close your account and begin a repayment program at a lowered interest rate.  The interest rates for this vary from bank to bank but are not any different from those rates that would be provided through a debt consolidation firm.

The advantage of using a debt consolidation firm is simply the ease of making one single payment and the firm will disburse the funds to the appropriate banks.  If you have a great number of cards, it may be worth your while to incur the additional expense of using a firm.

Entering into a debt consolidation program does not reduce or eliminate any part of your debt.   You are still responsible for repaying the entire balance, and regardless of what a so-called “credit counselor” will tell you, your credit score will take a nose dive and since it will take a long time to repay your balances, it will be a long time until you can begin to rebuild your score.

In summary, using a debt consolidation firm to resolve your credit card balances is overall a poor choice.  Most of the “credit counselors” are telemarketers and thier collective knowledge of how credit works is not very impressive.

Your comments on this are encouraged and if you have any personal experiences that you would like to share, our readers and subscribers would welcome them.