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Approximately 9 million Americans reach out to the organizations that offer debt settlement every year. In Illinois, they do so under state-mandated regulations. In 2010, the state put into place the Debt Settlement Consumer Protection Act, designed to shield consumers against high fees and questionable practices. Under the terms of the Act, all debt settlement providers must be licensed with the state, which keeps a list of registered companies online at the Department of Financial and Professional Regulation.
Once you've confirmed that the organization is on the list, what follows is an outline of the usual steps in a debt settlement arrangement.
When to Use It
Debt settlement can be a tool to pay off a single debt all at once. While credit counseling in general is a prerequisite for debtors before they file for Chapter 7 or Chapter 13 bankruptcy, debt settlement is not. However, it can be an effective way to avoid bankruptcy.
How Debt Settlement Works
An organization, attorney, or public accountant negotiates a one-time payment with a creditor that is lower than the full amount owed. The debt settlement provider works as a go-between. They receive your payments and then pass them along to the creditor.
Illinois Consumer Protection
Under the Debt Settlement Consumer Protection Act, your provider can't charge you more than $50 up-front for debt settlement services, and they can't charge you any more than 15% of the total savings they secure for you under a plan. Furthermore, the provider must give to you in writing a full estimate of the cost and time-frame that the debt settlement plan will entail, and they must disclose in writing to you a full list of the ways debt settlement can impact your credit score. Even given all of these protections, read the fine print. If you're working with a lawyer instead of a nonprofit counselor there may be legal and filing fees attached to your plan, and those aren't always limited by the state's provisions. Also, whatever the amount of your total debt that is forgiven under a debt settlement: it's nearly always treated as taxable income.
Read the complete language of the law for more detail. If you encounter a provider that is not complying with the rules of the DSCPA, contact the state Attorney General's office.
The state requires its credit counseling services to register with the Illinois Secretary of State Index Bureau and the Department of Financial and Professional Regulation. Prior to engaging any particular service, check with the department to see if the organization in question is properly listed.
Once you confirmed that you're working with a reputable agency, what follows are some key points to arranging a successful credit-counseling arrangement.
When to Use Credit Counseling
Credit counseling is one way to bring your personal debt back under control. It can also help with restoring your credit score if late payments and large balances have hurt it. In most cases, credit counseling is a requirement before you can qualify for Chapter 7 or Chapter 13 bankruptcy. Note that, even with credit counseling, you won't be able completely clear your credit history. But credit counseling can help you get to a better future, and onto the path toward a score that will help you down the road.
How Credit Counseling Works in Illinois
Credit counseling agencies make deals with creditors that result in lower interest rates and smaller monthly payments. In most cases, the process takes several years. Credit counseling starts with a monthly deposit to the service you've chosen, and then you must also promise not to apply for — or use any — new credit while the agreement is underway. Additionally, a credit counselor may be able to help you settle a debt outright with a creditor.
Other Details for Illinois Residents
Illinois does not cap what credit counselors can charge for their services, but the state strongly encourages consumers to perform due diligence before signing up with any agency. Beyond confirming that the organization is registered with the state, the Department of Financial and Professional Regulation suggests debtors check with the Better Business Bureau and the Illinois Attorney General's office for any outstanding complaints. The department provides an additional list of questions to ask before agreeing to credit counseling.
If you have questions or complaints about consumer credit service organizations, contact the state's Attorney General's office.