Debt Settlement - almost NEVER the right choice . . .

I hope I caught your attention with the word 'never' in the title.  I know we should *never* use the word 'never' but I'm getting very frustrated with the number of clients who end up in my office having been misled about what exactly a debt settlement company does.

First let me get something straight.  I refer people to other agencies and companies all the time.  There's definitely not a 'one size fits all' mentality when helping people get out of debt.  For some, going through consumer credit counseling is the way to go.  For others, it's obvious bankruptcy is what they should consider doing.  Some people end up getting a debt consolidation loan or even a home equity loan.  For people considering signing up with a debt settlement company, I want to explain how they work and what the consequences of signing up with one will be.

Debt settlement companies charge an up-front fee, then have you send in monthly payments to them.  This money sits in a 'trust account' until they are ready to start negotiating with your creditors.  Typically you pay into a fund for almost a year.  Meanwhile, the debt settlement company instructs you to STOP paying your creditors and they act as power of attorney where they write the creditors letters telling them to stop collection efforts.  The creditors stop calling and sometimes stop sending bills but they can certainly sue or refer to collection agencies and they can and do sue as well.  The whole point is, theoretically when these creditors get no payments for over a year, they get 'charged off' and when this happens the debt settlement company attempts to negotiate a partial pay off of the original debt.  Often times the creditor accepts as they have written off this debt and think you won't pay.  They accept a partial payment rather than nothing at all.

-----You are then charged a 'percentage' by the debt settlement company of what you have 'saved.'

-----Your credit report still shows a 'paid charge off' - which is one step less as bad as bankruptcy.

-----Meanwhile your other creditors are getting NOTHING and are getting increasingly mad and taking legal steps.  Your credit is trashed with late payments, no payments, charge offs and the like.

Here's my point - if you consider going through a debt settlement company, you might as well go bankrupt!! - take the big 'hit' to your credit, OWE nothing to the creditors, and be protected legally from any court action.  Then after paying legal fees, you can start rebuilding your credit and establishing new accounts, rather than having years of charge-offs cluttering up your credit report.

The only time I would consider a debt settlement company is if all your credit card accounts are *already* charged off for whatever reason.  Maybe you've gone through a divorce, a lay-off, or an extended illness and simply haven't been paying bills.  Then perhaps when you start getting back on track, it would make sense to negotiate with the creditors on these accounts that are already charged off.  BUT - you could do this on your own!!  Make sure you have everything in writing, maybe get some advice from a credit counselor at a non-profit agency about wording or what exactly should be in these written proposals.

Also, unless there is some situation like a spouse overseas on military duty or a person with deteriorating mental capacities, it is almost never a good idea to sign a Power of Attorney to another person or entity, especially a company in a far off state trying to negotiate debt!  This gives your personal power and negotiating abilities away.  It's far better to attempt this on your own, or with an attorney where everything can take place in the courts.

When dealing with debt - you have to keep the whole picture in mind.  Every creditor should be getting paid every month - something, anything - as an acknowledgement of - yes I know I owe you, I am sending in to you what I can! Or, debt should be looked at as a whole entity - during bankruptcy all of it goes away or all of it is paid a partial payment.  It simply doesn't make sense to pay the creditors NOTHING, then negotiate with one, a few months later another one, maybe a year later another one.

It's true - if something sounds too good to be true, it usually is!  I've heard the radio and tv ads - where you can 'settle your debt by paying pennies on the dollar!'  Yes, but with devastating consequences and usually in the end being in no better of a financial situation that you were before, in fact usually worse.

As always, with any company you choose to sign up with to help with finances, check them out with the Better Business Bureau, the State Attorney General Office, and google their name on-line.  See what others are saying about them.  Of course read, and re-read any contract you sign, make sure you can get out of it if need be, and check to see what sort of cancellation or early-termination fees there will be. 

Laura Piper, President - Consumer Credit & Debt Counseling Services, Inc.

laura@ccdcs.com

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