Does Interest Stop During Debt Settlement and Negotiation?

Debt Negotiation and Settlement Programs

Call Today: (877) 274-1260
If you successfully complete our program, it’s possible that you’ll enjoy these benefits:
	Settle your debts for less than you owe
	(read here for full details about how much you can expect to save)
	Resolve your unsecured debts in 18 to 60 months
	(read here for full details on how long our program lasts)
	No Up Front Fees - Don't Pay Till You See Results!

Interest Rate in Debt Settlement And Negotiation

One common question that consumers who are considering debt settlement ask is, “Do interest charges stop during the debt negotiation process?” This is a valid question and a concern of many consumers that some debt settlement companies fail to address during their consultations with consumers weighing their debt relief options.

In short, no, interest charges and late fees do not stop from accruing because you are enrolled in a debt settlement program and in many cases, account balances will increase by 30-60% before they are settled, in some cases more. That being said, the savings from enrolling in a debt negotiation service are still significant when an account is settled and the program is completed, especially when considered in light of the other alternatives available---continuing with just making the minimum payment and credit counseling.

The debt relief is still significant for a couple reasons. First and perhaps most importantly, the interest charges from credit cards can be so high that consumers who are just able to afford the minimum payments cannot be debt free for up to 20 years. To better understand this concept, consider the following. Let’s assume that a client in debt settlement who owes $30,000 will pay roughly $600 per month for 33 months. Including the fees charged by the debt settlement company the consumer pays back roughly 66% of the total debt they owed. If the consumer were to pay $550 per month to their credit card minimum payments instead (which is a doubtful scenario because most credit card companies ask for at least 2% of the balance, or $600), assuming they are being charged interest at an annual rate of 19%, they would pay almost $70,000 over 10 years before they were finally debt free. Worse yet, if anything were to happen during those ten years that forced a consumer to miss a payment (reduction in income, sudden expense like car repairs or medical bills) the credit card companies would most likely jack the interest up to the dreaded default rate, which is oftentimes as high as 32 percent annually. Considering the fact that the debt is being paid back over 10 years, it is highly possible that an unforeseen circumstance would come up during that time period that could make missing a payment inevitable.

The second reason why the savings from debt settlement may still be dramatic (assuming accounts are settled and the program is completed), despite the interest and late fees accrued during the negotiation process, is that in some cases the finance charges will slow once the account has been charged off, which normally occurs once the debt has been delinquent for 6 to 8 months. This is not necessarily guaranteed to happen, but even in the worst case scenario (the interest charges continue to accrue throughout the negotiations), consumers pay far less than they would have paid otherwise by making minimum payments, which as we illustrated in the paragraph above can be as high as $70,000.

Where the Interest Charges Can Hurt You in Debt Settlement

So although most people wonder whether interest charges affect the savings on settled accounts, the truth is non-settled accounts or accounts settled with attorneys are the most affected by the accruing interest and late charges. For example, a $10,000 account grows to $14,000 before it is settled. Depending on the creditor and the collection agency, a 30% settlement is realistic on a balance of that size, which would knock $5,800 off the balance alone. Including our fees (15% of the balance), the client would save $4,300. Not bad, especially considering the costs of credit counseling and the minimum payments would be far more than that.

So that’s the good case scenario where the interest certainly affects the savings, but the increase in the balance is offset by a favorable settlement percentage.

On non-settled accounts, however, the accrued late fees and interest charges make a much greater impact. The leading cause of an account not being able to be settled is from legal action being taken on an account before FDR ever has the chance to negotiate a settlement. When this happens, your account is forwarded to an attorney in your state who will either demand a settlement amount that is higher than our targets (usually in the 60 to 80% range), a payment plan for the full balance plus interest, or they can file a lawsuit against you to win a judgment, which will allow them to garnish your wages, put a lien on your property, or levy your bank account (these three actions are collectively known as “judgment execution”). In nearly every case, FDR is able to negotiate a resolution to prevent the execution of a judgment, although the payment terms may be difficult for some clients to afford and the overall costs tend to be high because of the late fees and interest charges are included.

Let’s use the $10,000 account growing to $14,000 mentioned earlier to give you a better idea of the impact. If that account is settled at 70%, then the client ends up paying $9,800, which, if you include our fees, means they would pay more than the original balance. In other cases, the client may not have the funds accumulated for settlement and FDR is forced to negotiate a payment plan instead. Assuming FDR is able to set up a payment plan for 9% interest over 36 months, the total cost to the client is _____.

Why You Still Save in Debt Settlement

As shown in the previous section, the savings from debt settlement are very much compromised on non-settled accounts or accounts settled with attorneys. With that said, Franklin Debt Relief still stands behind debt settlement as a method for resolving debts for consumers and feels that achieving savings is very much possible for people who complete the program, despite the possibility of an account being forwarded to an attorney. Here’s why:

1) The number of accounts FDR resolves with collection agencies and original creditors far outweighs those resolved with attorneys. At the time of this writing, (June 1, 2009) the ratio of accounts resolved with attorneys to collection agencies and original creditors is hover around 4:1 to 6:1 on a monthly basis, although this could certainly change in the future depending on creditor policies.

2) The example in the previous section assumes that 100% of your accounts are forwarded to an attorney. In reality, this rarely happens, although it is certainly possible.

3) The potential savings from debt settlement should not be viewed in a vacuum, but rather relative to the other options available to you. Even in the worst case scenario, it is likely that you would save more in debt settlement than paying the minimums. Unfortunately, there is no solution outside of debt settlement that has the potential to save you off your balances without assuming this risk.

Where Does That Leave You

As mentioned through the website, debt settlement is an appropriate option for those who have fallen behind or will fall behind on their payments in the foreseeable future and want to avoid the negative consequences of filing bankruptcy. If you do not have problems with your debt, it is possible that debt settlement can make your situation worse than it was before because of the fact that interest and late fees accumulate on the balance until an account is resolved.

If you are experiencing debt problems, however, Franklin Debt Relief offers an honorable and realistic solution, albeit one with shortcomings and risks, that can potentially help you regain your financial footing, save money and get out from under your mountain of debt quickly if you complete the program.