Negotiating and settling debts that are past due at all stages of debt collection is thoroughly discussed throughout this site. With all of this detailed information and discussion, don’t forget to plan and prepare for one of the basic elements of settling your credit card debt. All successful debt negotiations have two things in common…a documented agreement (covered in the previous section) and paying the settlement agreement.
NOTE: This post is part of our Debt Settlement Guide. If you’ve missed any of the previous content, or would like to start at the beginning, please see the links at the bottom of this page.
At this point, it should be well understood that the main ingredient to completing a debt settlement program is having the money available to complete the lower pay off deals as they are negotiated. There are recommended ways for establishing and fortifying your “war chest” of cash resources to fund the debts you’re settling. The focus of this page is the type of bank account you should use that your funds will be deposited in for the purpose of, first accumulating and holding money, and later used to distribute payments in satisfaction of your debts that are negotiated.
There are two recommendable ways that these accounts have been traditionally set up – “self saver” accounts & Escrow Accounts.
Using Escrow Accounts for Debt Settlement
Third-party escrow services are the most common type of account used by professional debt relief service providers. When an escrow account is set up correctly, your money is deposited into a separate FDIC insured account in your name. You add money to the escrow account every month in order to build up your “debt settlement war chest”. Pushing money into your escrow account is typically done through an ACH or auto-draft on the same day each month. You can usually add additional money to your escrow account (like from a tax refund or other source), anytime.
The amount of money in your escrow account will build over time. When there is enough in your escrow account to fund a targeted settlement with one of your creditors, the professional you hired will begin serious debt negotiations. When an agreement is reached and documented, the money in your escrow account is used to fund the settlement. You will continue the process of saving and sending money to your escrow account each month until the next settlement is reached. You then simply wash, rinse, and repeat.
If you’re using a typical debt settlement company to settle your credit card debt for you, virtually all of them will use an outside third-party escrow company for warehousing your money that they will later use to fund the settlements they negotiate for you.
Debt settlement attorneys may/may not use an outside escrow service for holding your money until settlements are reached. Attorneys will often use segregated trust accounts for holding client funds. Attorneys are held to a fiduciary standard when dealing with client money, so escrow accounts are not necessarily something that will be offered to you.
A key to the escrow account is that you can request your money be released to you at anytime. A legitimate debt settlement company will only recommend escrow accounts that are set up in this manner. There are monthly fees associated with using most escrow services.
I have always looked at outside third-party escrow accounts as an unnecessary expense that is passed on to the person hiring a debt settlement company. But I also recognize the efficiency that a debt settlement company needs to do their job, and escrow accounts set up in your name at an FDIC insured bank provides many efficiencies for settling debt.
Using Your Own Bank Account to Pay Debt Collectors
A “self saver” account is just a standard checking account set up independent of anyone, in your own name, and often at a local bank branch. It should be an account that offers you the ability to fund settlements using check by phone, and ACH types of payment. You should open an account separate of the checking account you use to pay your monthly bills. Similar to how you work with a debt settlement company, or settlement attorney, you would add money to your account each month and allow the money to accumulate.
When settlements are documented and accepted, the payment in satisfaction of the now-reduced balance will be drafted from this account. Fees for this account, if any, will be what are charged by the bank you open the account with.
Because CRN has primarily advocated DIY debt settlement, we have always promoted self saver accounts as a way for you to save up money over time in order to pay collectors as they are negotiated. When our members ask for a professional to do the negotiations, we have had no trouble working with our members using the separate self saver account approach. You save on escrow account fees, and your money is in your absolute control at all times. This way of providing professional debt negotiation also assures that you see every agreement to settle in writing, and every settlement is discussed with you before it is accepted and paid. We find this to be the better way of providing debt settlement services, but we are one of only a few companies that operate this way. It may be less efficient for us, but it saves you money, provides the most protection, and offers the most transparency of what is going on with your settlements.
There is one type of person that will benefit more from using an outside escrow account service. If you cannot trust yourself with the money you’re saving to settle your unpaid bills (even though you can withdraw funds from your escrow account anytime), the separation from being able to hit the ATM, or write a check, can make a difference.
Why Pay Collectors Through a Separate Bank Account
There are benefits to using a separate account to pay collectors (settlement agreements). Some of the benefits are hard to overlook, and some are just not as critical of a concern as they once were. Some of these benefits are:
- The money is not mingled with funds used for regular living expenses. The tendency for most people will be to leave money in this separate account untouched except for its intended purpose – funding settlements.
- There is less of a temptation to use the funds for a discretionary purchase.
- Settlement funds on deposit in the account can be limited to the amount needed to fully fund one deal at a time which helps avoid problems if a transaction error were to occur that would have otherwise caused you to run short of money to cover other checks you have written, or auto draft payments for bills. Transaction errors are extremely rare, but leaving nothing to chance is just good planning.
Your set-aside account should not be opened at a bank with whom you have an account you will be negotiating a settlement with. If you currently have either a checking or savings account with a creditor you are behind in making credit card payments to, move accounts. Having your accounts, whether for personal daily use or for set aside funds, at a different bank is imperative.
A bank, typically, cannot see your balances, deposits and transactions with another bank. They can see balances, debits and deposits you have with accounts internal to their own institution. Negotiating a reduction in balance that you can afford to pay is complicated by objections that the creditor may raise if they can see that you have more than what is represented as your ability to fund on deposit in an account with them. The bank is likely not going to weigh whether some of those funds are for rent or a mortgage payment, and will not really care if some of the balance they see on deposit is earmarked for a different creditor you have fallen behind in paying.
The best thing to do in order to prevent these kinds of objections from even occurring is to have all accounts currently in use at a different bank. If you would like to keep a checking account open with little money on deposit, until any past due credit card balances are settled with that same creditor, that’s okay. You can go back to using that bank after satisfying your settlement agreements. It is sometimes a matter of how convenient that bank is to your work or home, or even the friendly tellers at a certain branch, that you’ll miss.
One key to experiencing as smooth a debt settlement process as possible will be your continued funding and the safe holding of the money you will need to meet all offers to settle accounts for less than the balance owed. Placing those funds in an appropriate escrow or self saver account, as outlined above, is recommended.
This completes our Debt Settlement Guide blog series. If you missed any previous sections of the guide, please see below. If you’re looking for something specific that wasn’t covered within the guide, please use the search bar to the right, see our Debt Settlement FAQ, or post in the comments below for dedicated feedback from Michael or shared experiences from our readers who have been there.
This Debt Settlement Guide includes:
An Expert Guide to Credit Card Debt Settlement
How and Why Banks Settle Credit Card Debt with You
Types of Accounts to Include in Your Debt Settlement Plan
Why Settling Credit Card Debt is Like a Race
How to Settle Credit Card Debt Quickly
How to Talk to a Debt Collector
How to Negotiate Credit Card Debt Successfully Yourself
7 Largest Credit Card Banks and How They Settle Debt
Get Debt Settlement Letters and Agreements from Collectors
How to Pay Debt Collectors After You Negotiated a Settlement (you are here)