Credit and Debt Blog

Debt settlement companies often state that they can settle your debts for pennies on the dollar or even up to less than half of what you owe. They also tend to overstate the actual amount of work that they do on your behalf.

Initially, debt settlement companies do little more than charge you an upfront fee and a monthly fee for a glorified savings account. They rarely provide substantial counseling or education. Instead, their employees are trained and compensated for selling debt settlement, whether you need it or not!

Debt settlement companies may send letters on your behalf, but you can do it yourself for free. These letters simply are not that complicated. In fact, there are numerous templates available on the internet.

The truth is that you can settle your own debts if you arm yourself with information and begin saving money to use for a lump sum payment. If you do it yourself, you may also save thousands of dollars in fees. This is money that could go toward settling your debt.

The erroneous claims by debt settlement companies and the high levels of complaints by debtors have sparked discussion by key regulators and industry representatives. The Federal Trade Commission held a special workshop on September 25, 2008 in which they elaborated on the false claims by many debt settlement companies.

According to Lydia Parnes of the FTC, these are the primary problems that are occurring:

Through consumer complaints and many FTC and state enforcement actions we have seen several problems in the debt settlement industry. Over the past three years we’ve brought cases alleging that certain debt settlement companies have made deceptive marketing claims including the failure to disclose substantial up-front fees and misrepresentations that credit or collection activities would stop during the duration of the debt settlement program. In one case the commission alleged that unqualified claims that the defendant would reduce debts by up to 60% were deceptive. In another we allege the descendents claimed they would begin negotiating with consumers’ creditors within weeks—these are all from consumers’ perspective, these are all highly material claims.

Here is additional perspective provided by William Binzel of the National Foundation for Consumer Credit:

Let’s look at their business model. Advertise aggressively on TV and radio. Promise consumers that they will stop collection calls and settle debts quickly and easily for pennies on the dollar. Be secretive about the fees. Collect huge up-front fees before providing any services. Provide little or nothing in the way of financial counseling or education. Require monthly payments from the consumer, deduct a service charge but make no payments to the creditor on behalf of the consumer. Hold the consumers’ money for months and months until there’s enough money in the account to offer settlement to one creditor and start the process all over. What does the consumer get out of this deal? Consumer gets to pay exorbitant fees and monthly payments, gets little or no disclosures. Gets little or nothing in the way of professional services. Virtually no ability to cancel the agreement. The debt gets bigger and they amass more interest and late charges. He’s subject to legal collection efforts including litigation, judgment, garnishment of wages. His credit history is trashed. At the end of the day he gets a bill from the IRS for tax liability. Hardly a pro-consumer business model.

The lesson here is that it is common knowledge within the debt relief services industry that debt settlement companies are there for one purpose—profit. Debtors that choose to utilize debt settlement companies rarely benefit, and many suffer additional setbacks.

There is no silver lining with using debt settlement companies. You can accomplish most if not all of what they do without paying fees. In many cases, the fee savings actually allow you come out better without using a debt settlement company.

If you have multiple collections accounts, then consider meeting with a credit counselor to review your credit report. You may be better off paying some of those on your own. Even negotiating a settlement with a creditor on your own may be an option.

If you multiple unsecured credit card accounts that have not gone to collections, then you should definitely seek the assistance of a nonprofit credit counseling agency. You may be able to get interest rate reductions and lower payments, either on your own or through a debt management program. Either way, your counselor can show you how.