I know you’ve seen the television commercial and heard the radio announcements about debt settlement. In fact, it’s hard NOT to run across these ads at some point during the day or night.
“Do you have more than $10,000 in credit card debt? If so, you MAY qualify to have your credit card bills CUT IN HALF! Hurry and call 800-bla-blah and take advantage of this limited time government program that lets consumers stick it to the credit card companies … “
Just remember, if it sounds too good to be true, it is. And it certainly is when it comes to many of these debt settlement companies. Those commercials make it sound like you’ll sail off into a beautiful sunset, with not a care in the world.
Back in 1997, I worked with a member of the National Federation of Credit Counseling to help me get my financial life back under control. There were no promises of “debt elimination” or of “sticking it” to the credit card companies. Rather, everything was handled professionally as they helped my wife and me draw up and live by a budget, pay my creditors responsibly, and get out of debt.
The National Federation of Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA) contacted me to get the word out about debt settlement companies and help readers and their families steer clear of offers that on the surface may seem good, but in the end leave folks worse off than when they began.
Not all debt settlement companies are members of the NFCC or the AICCCA
Before you deal with any company, organization, or group, make certain they are members of one of these organizations. If a company isn’t a member, you should move on to one that is in my opinion. Check out their website at DebtAdvice.org. Here are six truths about debt settlement the debt settlement companies don’t want you to know:
1. Settlement companies charge hefty fees
How else can they pay advertising bills and pay the salaries of the people that work for them? The two primary ways that fees are charged – to you – are:
- A percentage of your total debt, usually 13 to 20 percent
- A percentage of the debt they help you “eliminate,” sometimes as high as 35 percent
In addition to these fees, debt settlement companies also charge a “monthly maintenance” fee, typically between $20 to $90 per month while you’re on their program.
2. Some debt settlement companies “front load” their fees
In other words, they get their cut before any funds are forwarded to your creditors. It’s a beautiful cash flow system … if you’re the debt settlement company. The truth is, it may be months before any money is sent to your creditors.
3. A debt settlement company may suggest you stop paying your creditors
Instead, they instruct you to send your payments to a third-party escrow account while they negotiate your debt. While these negotiations are on-going, you’ll be racking up more interest and penalties and by the time negotiations are completed, you may owe more than when you started. The negotiations can take months while you’re credit score suffers and your creditors initiate legal proceedings against you. Those could include judgments, wage garnishments, and liens.
4. Your credit report will certainly suffer
Debts that are paid through a settlement company will probably show up as “Paid by Settlement” and every creditor knows what that means: you didn’t pay everything you agreed to pay. As a result, you may be denied credit in the future.
5. Your credit score will suffer, too
Your report is just raw data, your score is a numerical interpretation of that data. The higher your credit score, the better. Scores are weighted according to various factors with the highest weight given to your past history of payments:
6. Forgiven debt could be considered income by the IRS
It just gets worse and worse. If you have more than $600 in forgiven debt, you could be responsible for paying taxes on that money.
Both the NFCC and AICCCA strongly encourage consumers to thoroughly investigate and understand any debt resolution option before making a decision. Keep in mind that it’s up to you to do your homework before working with anyone, particularly if it involves your finances.
Many of these companies offer promises that make the path to financial freedom sound very appealing, but the reality may be very different than the dreamy pictures in those commercials, so DO YOUR HOMEWORK!
Photo by ME – taken with a Canon Powershot as we sailed out of the Puget Sound on a cruise through the inside passage to Alaska in June 2010.