Debt negotiation programs (DNPs) are offered as last-ditch efforts to get off debt, but are not the same as credit counseling or a debt management plan (DMP, easily confused with DNP). Some DNPs are legitimate and arguably valuable, but many of them can be risky and could actually have the effect of harming one's credit rating. See Becoming Debt-Free: Your Options for alternatives and Avoiding Credit Repair and Credit Counseling Scams to learn more about the dangers of certain types of debt management organizations.
Also called "debt settlement companies," DNPs often are set up as nonprofits (though some state laws have tightened requirements for debt service companies). The organizations claim to be able to cut a consumer's original debt load by around half, through negotiations with the creditors. Fees can be quite steep for a DNP, often topped off with a final bill based on a percentage of debt supposedly saved.
Most of them make claims that their services will not have a negative impact on your credit score or ability to get future credit. But all too often, debt negotiation programs leave debtors with either additional debt or the ill effects of a poor credit profile.
Since most creditors don't settle debts until they are several months overdue, many of the settlements come with strings attached: late fees, higher interest rates, and delinquency notices, which will damage your credit. Also, not making your monthly payments could lead to lawsuits, wage garnishment, or liens put on your home by creditors. Creditors, in turn, will likely report negative information to credit reporting agencies (resulting in an even lower credit rating). The amount of debt saved through debt negotiation could even be considered taxable income by the Internal Revenue Service (IRS).
Not all DNPs are shady, but consumers really need to understand what they're getting into if they choose this option. Consider speaking with a bankruptcy attorney if you have additional questions.
Many states have passed laws regulating DNPs to varying degrees, while some of them (including Colorado, Nevada, and Tennessee) have adopted the Uniform Debt-Management Services Act (UDMSA). The Act includes (but is not limited to) the following provisions:
Debt negotiation programs that do any of the following should be avoided at all costs:
Make sure you fully understand the terms of your contract before signing onto a debt negotiation program, and consider checking it out with your state's Attorney General. There are numerous options for debt relief, so choose wisely.