The High Cost of Debt Settlement
The Consumerist recently ran a piece written by a former employee of a debt settlement company. His warnings could prove invaluable to those seeking the best option for eliminating debt.
First of all, let's take a look at what debt settlement companies offer to do for their clients. Many market themselves as an alternative to bankruptcy, credit counseling and debt consolidation and claim to be able to seriously reduce credit card debt for their clients.
The author of the Consumerist article worked for a company that promised to negotiate with creditors to reduce clients' payments by 50% - for a fee, of course. But, according to his report, the service was rarely as straightforward as advertised.
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Beware of the Contract
Signing a contract without reading and fully understanding its terms can be financially devastating - many borrowers who took out subprime mortgage loans learned during foreclosure proceedings that their contracts contained terms very different from what the lender or mortgage broker described.
Unfortunately, it seems signing contracts without full understanding is not limited to the mortgage industry. The Consumerist article describes the terms of the contract clients had to sign with the debt settlement agency, which included the following terms:
- The company was not responsible for any damage to clients' credit scores;
- The company could cancel a client at any time without providing a refund;
- Any client who cancelled his services was still obligated to pay in full for the services;
- Money for payments was taken directly from clients' checking accounts;
- The company did not interfere with creditor/client relationships; and
- The company did not encourage clients to stop making payments on debts owed.
Besides these outrageous stipulations, the contract was reportedly written in complex legal jargon that few people without a law degree could understand.
To make matters worse, the sales team apparently received hefty bonuses for signing new clients, and would blatantly lie about the terms of the contracts in order to have customers sign on the dotted line. Assuming the workers were honest, many clients evidently signed, legally binding themselves to highly unfair terms.
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"Settling" Debt
As mentioned above, some debt settlement agencies promise to reduce debt by 50%. But this can be a very misleading promise.
The author of the article noted that many clients were told to stop paying their creditors because the debt settlement agents could not negotiate better terms with creditors unless accounts were in default. As a result, most clients reportedly saw their total debt increase significantly.
By the time the agency had negotiated a 50% payment, many clients owed twice as much, and so ended up paying what they originally owed - plus fees for the service!
Besides the increased debt, many clients had serious declines in their credit reports, liens put on their property, or wages garnished as a result of letting their accounts go into default. And, according to the author, debt settlement companies demand unreasonably high fees and monthly payments that usually don't benefit debtors in the long run.
Alternatives that Work
An MSN article examining the practices and costs of some debt settlement companies found that fees for debt settlement services can total thousands of dollars - in many cases, more than a debtor would have paid a lawyer for financial advice and help.
And, apparently, most creditors would prefer to work out a settlement than receive no payment at all.
If you're struggling with debt, you have viable options. To arrange for a free consultation with a bankruptcy lawyer , fill out this online form today. You can discuss filing for bankruptcy, working with a credit counseling service, negotiating lower payments with creditors and doing much more.
Remember, if an offer to eliminate your debt sounds too good to be true, it most likely is.