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.)
Here is a wonderful article from SmartMoney.com on Debt Settlement Companies to which we invite your attention. It discusses the techniques used in the ‘debt settlement’ process, the costs involved and the unlikelihood that a debtor who is in serious trouble gain benefit from the process. The bottom line is that they are rarely worth it.
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. Check out one of the agencies on our referral page. All of these are safe bets.
* 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, a few of which appear on our referral page.