Protect Your Checking Account When Attempting Debt Settlement

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Debt settlement is becoming a hot topic these days. Consumers, faced with staggering amounts of debt, are searching for solutions to free themselves from escalating payments, interest rates, and fees. Whether working with a debt settlement company or attempting to negotiate your debts on your own, there are things you need to do to protect yourself in the process.

Move Your Bank Account

If you are planning on negotiating with a creditor that also services your checking or savings account, it is important that you move that account prior to any settlement efforts. There are two primary concerns when dealing with a creditor that you also bank with.

1) The funds you have in your checking and savings will be available to the creditor and possibly a third-party agency they retain during any collection or settlement efforts.  Not only will they attempt to collect, at a minimum, the amounts you have in any checking and savings account you have with them, they will also have the upper-hand in any negotiation. Moving these accounts prior to negotiations will help you deflect collection efforts and properly negotiate based on your circumstances.

2)  The “Right of Offset” comes into play. The”Right of Offset” gives the banking institution that you have both depository and credit accounts with to offset delinquent debts with the money held in the deposit accounts. A creditor can only do this if both the deposit and credit account is with them. By moving your depository accounts to another institution, the only way they could access the funds in your checking or savings account would be through legal proceedings and a resulting garnishment order.

You do not need to move your checking and savings account if you’ve simply paid a creditor from that account but the creditor and the bank are not one in the same. For example, previously paying a Capital One credit card from a Bank of America checking account does not put you at risk.

Separate Settlement Accounts

In most cases, you will be diverting a portion what would normally be your monthly payment to various creditors into a settlement account that you will use to settle the debts once you’ve accumulated enough money. It is important that you open up a separate checking account to hold these funds and eventually distribute the funds from. You do not want to save these funds in your primary checking account.

When a settlement agreement is reached, creditors will typically expect that you will pay the amount due electronically via a “phone check” or electronic bank draft.  Unfortunately, mistakes sometimes do take place, and payments are taken early or in the wrong amounts.

In case a mistake is made, you do not want it interfering with the other payments you may be making for your rent, mortgage, utilities, etc. Also, when a mistake is made, it is easier to correct when in an account with less transactions.

Moving your primary checking account when appropriate and setting up a separate account for settlement purposes will help to protect your money as well as ensure you are negotiating on a level playing field.

About the Author:
Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges. He can be contacted by visiting his personal site, GoodCreditLiving.com.

Post written by Chris Rocks

3 Responses to “Protect Your Checking Account When Attempting Debt Settlement”

1. Tedda Says:
   June 22nd, 2009 at 11:05 am

   ohh…nice post but really

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