Debt settlement companies are not always a scam, but all too often that’s exactly what they are. Many-certainly not all-people at the economic bottom (in this case, people buried in debt) aren’t as sophisticated as other consumers and can be more easily exploited, so naturally their plight draws just the sort of vultures skilled at such exploitation.
For starters, non-profit debt settlement companies are sometimes not non-profit in any meaningful sense. Many such companies have gotten into legal trouble-and these are just the ones who’ve been caught-because they are really for-profit companies that set up a subsidiary or front company that they try to structure so that technically it counts as non-profit, though it makes them just as much money as if it were not.
But here are some points to think about if you are considering using a debt settlement company:
* Check out the company by contacting the Better Business Bureau, contacting your state and local consumer protection agencies, and even by Googling the company’s name and “scam” or “ripoff” to see what’s being said about them online.
* Be especially wary of companies registered in states that have no regulation or the weakest regulation of this kind of business. At present, Maryland and Florida fall into this category.
* Don’t let yourself get talked into paying additional fees that are a substantial percentage above what you already owe. A reputable non-profit firm won’t charge you exorbitantly for their service, and may well base its fees on a sliding scale so the lower your income, the less you have to pay them.
* Make sure to get everything in writing. Don’t rely on what you are told on the phone. Get a contract.
* If there’s any way you can, make sure you’re still paying the minimum monthly payments on your debt, even as this process of consolidation and settlement is moving forward.
Here’s the problem. Often the company is charging an upfront fee (in addition to a certain amount each month), and one or more of your first monthly payments to them are absorbed by this, with zero going to your creditors. For example, if they’re charging you a $600 fee, plus $25 a month after that, and they work out a plan with you to pay them $150 a month and they’ll pay your creditors, what happens is the first four monthly payments you make to them they pocket, and only starting with your fifth payment does $125 of it get disbursed to your creditors.
Well, when there’s this kind of delay in the “help” they’re giving you, it’s really not very helpful after all. Because in the interim, your creditors can still sue you, garnish your wages, send harassing collection agencies after you, destroy your credit rating, etc.
So watch out for companies that are vague about how the money you’re paying them is allocated, especially in that transitional period when you’re turning responsibility over to them to pay your bills. Don’t agree to pay them per month a hundred percent of what you’re capable of, if you’re going to need-at least in the beginning-to still make some minimum payments directly to your creditors yourself.
* Don’t be impressed if a company tells you that part of their service is that they have some kind of secret methods or mysterious connections with the credit bureaus to get them to remove damaging items and boost your credit score. If the items are accurate, they have no such clout to get the rules bent in your favor.
* Inform yourself as to the different ramifications of changing the terms in which you’re paying off your debt, versus settling it for a lesser amount. An example of the first would be if a creditor agrees to reduce your monthly minimum payment, to reduce your interest rate, and to reduce the fees for late payments to make it easier for you to pay what you owe, while still requiring you to ultimately pay off the whole balance. An example of the second would be if you owe a creditor $1,500, and they agree to accept only $1,000 if you’ll move them to the head of the line and pay it in a lump sum now.
Even if in the long run two such examples save you the same amount of money, the important difference between them is that the second can still hurt your credit score. Basically, to use the above example, it can show up in your credit report as your failing to pay $500 you owe, and the creditor choosing to close your account and not pursue you for it. Even though the debt in that sense isn’t active, it still looks bad to someone considering whether to give you credit in the future. Whereas if you had gotten a reduction in interest rates or some kind of a break like that, it wouldn’t show up on your credit report to hurt you in the future.
So understand what kind of deals, if any, the company is arranging with your creditors, and if and how those deals can affect your credit for the future.
* Maybe as important as anything is to realize that most or all of what these companies do for a fee, you can in principle do yourself. If you approach your creditors directly and tell them your situation and the most you can realistically pay them, you can often get as good a deal on your own behalf as one of these third parties could. Sometimes better in fact, as some credit card companies refuse to even deal with some of these third parties due to their poor reputation and business practices.