The other day I was conducting a workshop and someone asked me about debt settlement companies; she wanted to know the pros and cons of working with one.
Most people use debt settlement companies because they want to be debt-free, no matter what the cost is to their credit history. Remember what mama said: “If it’s too good to be true, it probably is.” Yeah, like someone is really going to come along, wave a magic wand, and your debt will disappear at no cost to you. Think again.
A debt settlement company will promise to settle your unsecured debt (credit card debt) for pennies on the dollar and stop the torment from collectors. Here’s their four-step program:
- You enter into an agreement with the debt settlement company.
- You agree to stop making payments to your creditors and refer collectors to the debt settlement company. Here’s the rub: late fees and interest will pile up on your debt.
- Now you start making your payments to the debt settlement company and they will deposit them in a “special account” they set up for you. You may now owe bank fees on this new account.
- When the debt settlement company deems you have enough money in your “special account,” they will then negotiate with your creditors.
Sounds simple enough, right?
Usually, before the debt settlement company sets up your “special account,” they will take their fee from your payments; this fee can be as much as $1,500. Keep in mind it may take years for your “special account” to accumulate enough funds before the debt settlement company is willing to negotiate. However, your creditor may not be willing to wait for the negotiation, or worse , they may not be willing to negotiate at all. Then where will you be? Frustrated won’t even begin to describe your feelings! Think about this: you’ve just been served with a lawsuit from your credit card company; in the meantime you’ve sent all this money to the debt settlement company, paid them a large fee, your debt has continued to grow, and now your credit card company won’t negotiate and so they sue you.
On the other hand, let’s say you get lucky and the debt settlers do negotiate for less than you owe. So, let’s say you have $20,000 in credit card debt, and it’s negotiated down to $12,000, for an $8,000 savings. The debt settlement company could charge you an additional fee of perhaps, 15% of the savings, or $1,200. Also, it could be the $8,000 goes on your credit record as an unpaid debt and stays there for many years. It’s not unlike walking away from $8,000 worth of debt. Would you loan someone money knowing they walked away from debt?