There has been a lot of media attention on some debt settlement companies over the last few years. They have left a string of people that perhaps didn’t need their services in a much worse financial position. The advertising that they have conducted gave the perception that they could help people reduce their debt. Debt settlement is not a realistic way of reducing a debt that you have been paying and have the ability to continue to pay.
There have been a number of companies that have cycled through starting up, advertising and gaining customers and then closing down. This happens over about a 24 month period and can have very negative effects on the people that it attracts. The debt settlement does not end up happening and all payments made are expended on fees and charges. This leaves the customers out of pocket and with a larger debt than they began with owed to their creditors.
What Debt Settlement Companies Are Selling?
The concept that debt settlement companies operate under is that your creditors will when offered an amount to settle your debt take that amount because they have little or no expectation of recovering the debt. This is usually explained in a debt management plan that is drawn up by the consultant that is dealing with your case. The advantage for you is that they offer to try and settle a debt for a percentage of the discount that they arrange for you.
The problem is that you are paying the company money before they have made any arrangements with any of your creditors. The debt management plan is only an estimate that is based on what they believe may happen it is not an agreement with your creditors.
- You are provided with an estimate of what the company may be able to negotiate for you.
- The estimate is not guaranteed and has not been discussed with your creditors.
- Your payments are accumulated by the company until they deem a sufficient amount is available to approach a creditor with a settlement amount.
One of the problems that you can face is when your debt continues to grow during the period that you sign up for the services and the time a settlement is made. If for example you had a $10,000 debt that the company believed that they could settle for $5,000 and their fees is 20% of the saved amount. The fee would be if successful $1,000. If the accrued interest, late fees and penalties increased the debt during the period before it was settled to $15,000 and the creditor agreed to settle for $5,000 then the fee payable would jump to $2,000.
The problem is during this period you have been making monthly payments and these payments first must satisfy the fees before they are credited against the amount owing. With multiple debts this can mean you are paying fees for years before the debts are settled.
- Fees are paid before any money is sent to your creditor to pay off debt.
- Increases in the amount owed can mean increased fees for the management company.
- If the company goes out of business then all your payments may be lost.
Debt Settlement or Debt Reduction
One of the areas that unscrupulous debt settlement companies have targeted is people that have a high debt burden but have been making their payments and continue to be in a situation where they are able to make payments. The typical scenario is as follows:
- Advertising in print, radio or television that offers a safe and effective way to reduce the debts that you have.
- Sales teams that sell the idea that paying the payments for the debt that they have is silly and by ceasing to pay and using their service that they can reduce the amount of debt they have by a sizeable amount.
- That they only get paid for the amount that they save you so they are on your side and will fight to get you the best deal.
- The paperwork and contract that a person signs does not reflect what they were told by the salesperson.
Debt settlement companies were started as an alternative to people going into bankruptcy. They could negotiate a lower settlement amount with the creditors that their client could pay and bankruptcy was avoided.
It is difficult to understand how this sort of structure could be marketed at people that are current with their obligations and are able to meet their payments. The only possible explanation is a cynical drive to gain the most fees. The clients cannot in anyway be said to be better off even if the claimed reduction in debts is delivered. The risks to their credit rating and the possibility that they could lose assets or be forced into bankruptcy far out ways the possibility of lower debt levels.