Can Debt Settlement Companies be Trusted?

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‘Debt Settlement’ companies.* It seems that there is a new one of them every week. They tout “you have the legal right to settle your debt for less money than you owe!” Well. duh!

Statements such as the above sound good when shouted across the airwaves in an announcer quality voice, but they are meaningless. Of course you have a legal right to settle your debt for less than you owe. (And you have the right to buy a car from Casey Chevrolet for less than the sticker price.) But you need the other side to agree. That’s what settlement means. These supposed debt settlement companies make it sound like they have the magic wand to make it happen. They don’t. They are just fee for services organizations that typically offer more than they can provide.

Are they any good? Statistically speaking, no. Do some people benefit? Of course, but the percentage is low.

Most debt settlement companies do in fact negotiate with your creditors. They also do get many creditors to agree to take less then what is stated on your last bill. But they do so in a most questionable fashion. First, they tell you to stop making payments to your creditors. Rather, you pay a set amount to the debt settlement company.

Then, the company holds onto the money in a reserve fund to be disbursed when the account is settled. After a few months of this, you are in default, and to the creditor, you are apparently in financial distress. Your credit rating is now taking. Taking advantage of this apparent distress, and the fact that a bankruptcy might be imminent, the debt settlement company calls each creditor with your tale of woe and the negotiations begin. A ‘settlement’ is typically reached.

But it gets worse. Once a repayment plan has been agreed upon, you continue making payments to the debt settlement company.  But the company is entitled to its fee for settling your debts, correct? And it collects its fee from the payments you have been making to this point. Typically the fee must be paid in full (or at least in major part) before any payments are made to your creditors. But you are blissfully unaware of this trap.

You are just feeling pretty happy since the creditors are no longer calling. You many even tell your friends about this great service that appears to be working out for you. You are so grateful that you ignore what is really happening: the debt settlement company is keeping your money (since its fee is not yet paid in full), and the creditors are still getting nothing!

So what do the creditors do when they don’t get paid? They sue you, of course. They negotiated a settlement with you (via your agent) and you stiffed them (again). That is precisely what these debt settlement agencies are counting on. Most debtors never finish paying even the up-front fee before the creditors, who are tired of waiting and decide to sue.

When you complain to the debt settlement company, it simply refers you to the contract you have with them.

You end up filing bankruptcy, just like the debt settlement company either planned, or reasonably knew was going to happen. They keep your money. (Often times they share the booty with the company that referred your case over to them. That’s what the fine print disclaimer that you see on the television ads are all about. The advertisers themselves frequently are not the actual debt counseling agencies. They are referral companies. They write and produce attractive ads. They are making ten of thousands of dollars off just the referrals. That should give you a sense of the enormity of the profits involved here.)

Our advise: don’t hire a debt settlement company you hear or see advertised on the radio, TV or newspaper unless the service is free or near free, or unless their fee is paid pro-rata with your creditors. That is how the consumer credit counseling services or similar (true) non-profit organizations work.

* Here we are talking about any company that is essentially a ‘for profit’ company which heavily advertises on the Internet, radio, television or print media. They tout the ability to instantly turn your life around, and promise that they can settle your debt for a fraction of what you owe. We are not talking about legitimate credit counseling agencies that are members of the Consumer Credit Counseling Service network and other agencies that have been approved by the US Trustee.