Voice of the Expert: The bad news on debt settlement companies
Encouraging words laced with bright promises do more for the soul than threatening tantrums. It’s no wonder debt settlement is big business.
Sexy advertisements offering to reduce your debt, run away creditors, beat down bankruptcy and straighten out your finances, thus paving the way for a stress-free life, are all over radio and television broadcasts.
While it may sound like music to the ears, it’s more like a bunch of noise in many cases, experts say. Often, consumers who seek help through debt settlement companies end up in even worse shape. But they come, still.
Why? For the 12-month period through September 2009, Georgia ranked third nationally with 7.52 bankruptcy filings per 1,000 people, according to the Administrative Office of the U.S. Courts. That trails only Nevada and Tennessee. Nationally, third quarter consumer bankruptcies totaled 373,308, a 33 percent increase over the same period in 2008, reported the American Bankruptcy Institute.
At Consumer Credit Counseling Service of Atlanta, those seeking debt management assistance average $18,000 to $20,000 in debt, according to public relations manager John McCosh.
That paints a gloomy picture, one countless people seek to erase through debt settlement or relief companies that purport to reduce credit card and unsecured debt. In Georgia, there are no license requirements for this type of service. The Federal Trade Commission continues to seek public comment on proposed rules to combat deceptive and abusive telemarketing of debt relief services.
“Their marketing methods are very effective,” said John Ulzheimer of Credit.com. “You watch commercials and you see happy families playing with children in the yard, and then you see the evil credit card company. They come across in such a friendly manner.”
It’s what they don’t say in the commercials that can be harmful.
# Upfront fees are high and many times lead nowhere. For instance, you come in with $10,000 in debt, the settlement company may promise to get it reduced to $5,000 — after you pay them $1,000. That’s money that could be used to help pay off the debt, McCosh said. You have funded their escrow account. Only after they’ve collected do they go to the creditors on your behalf.
# Credit scores often plummet. While debt settlement companies work on your case, they routinely advise debtors to withhold payments to card companies during negotiations. However, as FICO revealed last week, among the most damaging actions to credit scores are late payments.
“The longer the plan lasts, the more serious it is,” said McCosh.
# There are likely tax liabilities. Settlement companies rarely reveal initially that the amount of debt wiped out becomes taxable income.
# You could be sued. While you are going through the settlement process, you have no protection from credit card companies suing you, Ulzheimer said.
Consumers can either deal with creditors themselves, which is often overwhelming, or they can seek out a debt management plan.
These plans are designed to not only help consumers work with creditors, but also to help devise a long-term money management plan for consumers, McCosh said.
Settling debt is a punch in the gut of your credit score. Rather than settle, those working with Consumer Credit Counseling Service may have the interest rates on their cards reduced and payments lowered. They generally are required to close all open accounts and are asked to stick to a recommended budgeting plan.
“We often have to go back and forth with the creditor to propose something,” McCosh said. “Once the creditors all sign off, we send a formal proposal to the client, telling them what their monthly payment will be and how long it will take them to pay it off.”
McCosh said one benefit of CCCS is that it has built relationships with lenders that better enables it to negotiate, but if a client chooses not to use the nonprofit service, they’ll still get guidance to help them through the process. CCCS charges about $25-$50 fee per month for its debt management plan. Other nonprofits like InCharge Debt Solutions and Take Charge America offer similar services.
Ulzheimer said working with your lenders is almost always a better option than settling a debt. According to an MSN Money report, someone with a 680 credit score who settles could see a setback of 45 to 65 points on his or her credit score. Someone with a 780 score could see it plummet as much as 125 points.
“If you go to your lender and you owe $20, 000 and you say, ‘There’s no way I can pay this,’” Ulzheimer said, “they’d be foolish to ignore your request to have them work with you. It’s in their best interest to work with you instead of filing bankruptcy and they get nothing.”
As for debt settlement companies?
“They sound very compelling to someone who is desperate,” Ulzheimer said.
Have you ever worked with a debt relief company? What was your experience like? Would you ever turn to debt settlement as an option?
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13 comments Add your comment
DK
December 4th, 2009
10:01 am
My wife and I tried this about seven years ago. The company took an upfront payment and did nothing for us. Shortly afterward we were sued. I think these people are complete ripoffs. I’d never contact one of these companies again.
niki
December 4th, 2009
7:41 pm
I worked with debtfreetoday years ago. They consolidated my credit card debt so that it was easy to manage me debt with a single monthly payment. I paid them, and they paid my credit card companies. It worked out, but I only ended up in debt again because there was no credit education involved. I was only 19 or 20 at the time. I opted to do it again recently because it made the most sense for my situation, only this time I actually learned from my lesson.
Jacob Marta
December 5th, 2009
6:32 pm
Credit Counseling and Debt Settlement are two very different solutions meant for two different financial situations. It would be like hiring a criminal attorey to help you with a bankruptcy case. Yes, they are both attorneys but they do not help the same type of consumer.
Credit Counseling is for people in a minor debt situation, many times these debt amounts are smal and varied. Credit cards, utility bills, car loans, student loans and so on. These consumers are not facing bankruptcy, but they are simply never going to move out of debt unless they cut the interest rates and pay down the debt. Credit Counseling can help here. Note, that credit counseling is compensated by your credit card company. You pay back your debt IN FULL plus some interest. And this is a good thing for folks who can afford to do this. Generally your monthly payment is the SAME as your current payments. Consider that the credit counseling/debt management company only gets paid IF your remain in their program. This is why the programs last between 5-8 years. Generally the service a CCS provides is simply registering you into their program, giving you the predetermined rates the credit card companies want you to pay and setting up an auto debit/payment process to charge you. It is not all that different from a collection agency for the credit card company. A creditor can sue you at any time, if you are using credit counseling or negotiation. If a credit counseling service reduces any of your principal debt then you will also potentially owe taxes on that amount.
Contrast this with debt negotiation.
You MUST have a financial hardship that has made it impossible to pay your monthly credit card debt. You are facing a potential bankruptcy but would like to resolve the debt without a bankruptcy. Yes, you are charged for their service. Generally about 8% of your debt. This is paid over a set period of time, not all at once as the article suggests. More frequently companies are offering to spread that payment over many months. The example above uses 10,000 in debt. This is the very minimum for debt negotiation, and does not provide a good example of a savings. If you have the average of $30,000 in debt and reduce that to $15,000, and pay a $3,000 fee to do so then you have saved $12,000. Yes, you could owe taxes on that saved amount, IF and that is a big if, you have earned enough money to pay taxes. In otherwords if you are broke, earned little income, then you will likely pay little to nothing in taxes. Worse case, you pay taxes in full say $18%, or another $1,200 appx. You still have saved OVER $10,000!
So the important point is that you need to choose the right solution for your situation. If you have solid income and are able to pay your monthly bills then credit counseling may be right for you. If your sitiuation is far worse, you owe over $10,000 in credit card debt and you cant make your bills, your looking at bankruptcy the debt negotiation is an excellent option for you to explore.
Like any time you hire somebody you need to look at their credentials. There have been bad companies in settlement and credit counseling, but you cant taint the entire industrly because of a few. A company should be in business for at least 3 years. They should be accredited and licensed to do business in your state.
If you are interested in seeing what kind of reduction you could get with debt settlement go to http://www.creditcardbailout.com where you can use their free calculator. If you like you can also connect with a verified credentialed business to give you a full consultation on this option.
Review carefully all solutions. Check with your tax finance and legal professional before you make any final decision.
Best – Jacob
Can a Credit Card Company Sue You
December 7th, 2009
9:53 am
[...] The Bad News On Debt Settlement Companies … [...]
Paul
December 7th, 2009
2:06 pm
Like all companies in ALL industries, you will have companies that do a good job and others that are a total scam and waste of time. Do your research on the company you use as the internet has tons of good info on company reviews from people with past experience.
-Paul
http://www.predictivedollars.com
ruby
December 9th, 2009
6:44 am
If you want to take credit card debt settlement advice from a professional, you should be able to trust the advisor fully. So you need to check the credentials of the credit card debt settlement advisor/company.
There are hordes of people and companies that advertise “credit card debt settlement in one day” which will appear incredible.Such credit card offers are generally not genuine.
You need to understand that credit card debt settlement cannot happen overnight.
So, beware of such agencies. That said it’s important to mention that there are a lot of good credit card debt settlement advisors / companies available such as Debt Solution Centers who will not only give you genuine credit card debt settlement advice but will help you throughout until you are finally out of debt.
Their advice may, in fact, more than compensate for the fee that they charge you for credit card debt settlement.
These credit card debt settlement companies / advisors will be able to help you in the best way if you tell them your current financial situation correctly.
Your future plans are important too, as they might influence the decision on ‘What route for credit card debt settlement would work the best for you’.
Once you are done with your credit card debt settlement, you should also take measures to avoid falling into serious debt again.
debt
December 12th, 2009
1:51 am
Thanks Ruby!
Theadaykend
December 22nd, 2009
6:12 am
I think you are right. But you should cover more on this topic.
Connor Bringas
June 25th, 2010
5:22 pm
I agree. It takes time to research companies in general to figure out which one will work for your situation. Underground Elephant offers debt leads to debt settlement companies. We can help you find the right match for your situation. http://www.undergroundelephant.com
Education Leads
July 19th, 2010
4:40 pm
Thanks for the info on debt..its definitely hard to go through! http;//www.education-leads.org
getting out of debt can be hard, an an education is needed to improve your living.
Education Leads
July 19th, 2010
4:41 pm
Thanks for the info on debt..its definitely hard to go through! http://www.education-leads.org
getting out of debt can be hard, an an education is needed to improve your living.
Elvin
September 1st, 2010
9:01 am
Getting out of debt can be hard, and once you go for debt settlement, your problems starts resolving. Thus, finding out a trustworthy company for debt settlement is the most important step towards resolving the financial problem.
http://www.settlementdebtattorney.com/
Fred Esterly
September 2nd, 2010
4:17 am
Only an awareness can save you from such instances when a debt settlement attorney or company cheats you on pretext of debt settlement. If you are promise too many good things that are hard to believe, then get alert and think twice to proceed with them.
Visit here for more information: http://www.debtsettlementlink.com/