In my practice of law, this is the one term that absolutely makes my skin crawl. I have had countless people tell me that they had hired a debt settlement or debt consolidation company to assist them with their credit card accounts because they could not keep up with the payments. Hiring a debt settlement company is a HUGE mistake in most instances as I’ll try to explain below.
The theory behind hiring a debt settlement company is a great one, actually, let’s be honest about that. You are having trouble paying the credit card bills and this company comes along and says that they can help negotiate lower interest rates and lower balances, saving you thousands of dollars. They say that they can work with the creditors to stop or avoid lawsuits. They also say that they are only out to help you in your time of financial crisis.
In reality, though, it doesn’t work like that at all. To begin, the debt settlement company charges an up-front fee before they will work with you. I actually have no problem with that, I do the same thing. (My fee is nowhere near their fee, more about that later). The debt settlement company, however, will charge you a percentage of the debt as their fee. Let’s say that you owe $50000 to various credit card companies. The debt settlement company will charge you 15% to 20% of that amount as a fee. This could amount to $5000 to $10000. That’s quite a bit of money, don’t you agree?
The first problem is that you do not have that much money laying around, so they nicely agree to allow you to make payments. Let’s assume that you can make payments of $250 a month towards the fee. At that rate, it can take 1-2 years to pay off the debt settlement company’s up-front fee. What they may or may not tell you is that they will not do any work for you until the fee is paid in full. Do you think that your creditors are going to wait while you are paying your fee to the debt settlement company?
OK, so you finally get the fee paid off after a year or so of monthly payments. They start to work for you now, right? Well, in a word, no, they don’t, because now you have to build up your settlement account with them. A settlement account (or whatever they may call it) is an account of your funds that has to accumulate enough money for them to begin serious negotiations with the creditors. The settlement account has to contain enough money that the debt settlement company can use towards settling a specific credit account of yours. After all, there is no sense in negotiating if the settlement funds are not available. Again, do you think that your creditors are going to wait until your settlement account has enough money in it?
If you can get beyond the lengthy payment period of the up-front fee and the lengthy period of accumulating funds in your settlement account, then the debt settlement company can get down to actual negotiation on your account(s). They begin the negotiations and get a 25% reduction on the balance that you owe. Great! Right? Well no, actually here are three major problems there.
The first is that you could probably get a 25% reduction on your own, right at the onset of the credit problem, the second is that you paid the debt settlement company thousands of dollars to save yourself a couple of bucks, and third, because it took so long to pay off the up-front fee and accumulate funds in the settlement account, your balance on the credit card account has almost doubled because it has been accumulating interest at the 29% default interest rate.
I can go on and on about how bad most debt settlement companies are, but if you have read to this point, I hope that you understand my opinion of them. Even the “good” ones are of little help, and the bad ones are flat out scams.
To be honest, you would be much better off in hiring a consumer attorney (whether it’s me or someone else) to work on your behalf on credit card claims. We have a lot more power in negotiation (by the way, I rarely negotiate with collection agencies, see why here). I have never in my legal career charged someone $10000 to work on credit card legal claims, not even close.
By the way, ask the debt settlement company what they will do for you if one of your creditors files a lawsuit against you. If you get a real answer from them, or if you get any assistance at all, you will be the first that I have encountered… We have seen many instances where they advise you to either allow the judgment to happen or to plead that “you have no ability to pay”…both of those responses are awful and will put you into a deeper pile of problems.
If you have a credit card company, junk debt buyer or a collection agency attempting to collect a debt from you, or if you have more questions about debt settlement companies, please contact my office at 412-823-8003 or send an email to Attorney Greg Artim