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Debt Settlement Companies - Don’t Believe the Hype

We did a story on debt management services several months ago but it doesn’t hurt to go over it again particularly one aspect of debt management services - debt settlement.  New York Times had a good article yesterday about debt settlement: “Debt Settlers Offer Promises but Little Help”.  It is important to understand what is debt settlement, how it works and potential risks.

Debt settlement companies are making incredible promises in their radio, internet and T.V. advertisements.  They are trying to entice people who are very vulnerable with very high credit card balances.  They are making debt settlement sound easy but that can be expected after all it is advertising.  These debt settlement companies, which are popping up like weeds, are in this to make money. 

Debt settlement companies typically require upfront fees, usually a certain percentage of the total debt, the New York Times article mentioned 15%.  Some companies also charge various account set-up fees.  These fees may be in addition to required regular monthly deposits into a “settlement” account.  In the meantime, you are instructed by the debt settlement company, to not make any payments to the credit card companies.  After so many required deposits into “settlement” accounts and not paying credit card companies, the debt settlement companies will contact your creditors - the credit card companies and try to negotiate a deal with credit card companies based on the money deposited in the “settlement” account.  The theory is that the credit card company will take the money now instead of risking payment (or non-payment) later and settle for possibly cents on the dollar (ex. 40 cents on the dollar). 

The problems begin when the credit card companies don’t want to settle for cents on the dollar.  They believe they can get more by trying to collect themselves.  This makes a huge problem for us because we paid thousand of dollars to the debt settlement company.  In the case of the New York Times story, a couple paid over $3,000 in fees to the debt settlement company.  In addition, the credit card companies have been charging late fees and more interest/finance charges on the outstanding credit card balances that we have ignored because of the debt settlement process.  To make matters even worse, these non-payments to credit card companies are reflected in our credit reports - our credit scores may start to plummet.

The risk with using debt settlement companies is that they are not effective either because of incompetence, fraud or an unwillingness on the part of credit card companies to negotiate.  The debt settlement companies may not refund all the money that we paid to them and we still have to deal with the outstanding credit card balances.  The whole is even deeper.

The important thing is to do a lot of research before signing up with a debt settlement company.  A good place to start is with a HUD-approved counselor. Some counselors work on debt management in addition to housing.  Try to take advantage of any government services that may be offered regarding debt management.  Talk with credit card companies directly to see if they offer any programs. 

If you decide to avoid bankruptcy and sign with a debt settlement company make sure they are legitimate.  Research, particularly online, any consumer complaints that may have been filed against the company.  Check with the Better Business Bureau and state Attorney General’s office.  Please understand what the agreement is before signing.

Good luck.