Beware of Debt Settlement Companies - They Can Cost You More Than You Owe

Debt settlement companies can cost you more than you owe your creditors. The basic strategy of a Debt Settlement company is to tell the client to stop paying their unsecured bills (like credit cards) and open a special account and fund it with what they normally would pay their creditors. Over time this builds a “war chest” that the Debt Settlement company can use to negotiate a settlement of the debt often promised to be 40 cents on the dollar. Reducing your debt by 60% can be very appealing particularly to people who have no other option but bankruptcy.

There has been a boom in the debt settlement business with over 2,000 firms now operating in the U.S. In the past, non-profit credit counseling companies, that were supported by the credit card issuers, provided counseling and assisted with payment plans for people who found themselves unable to pay their credit card bills. Unfortunately the card issuers pulled back from negotiating and the counseling companies can do little for a client other than educate.

With the non-profits out of the market, a commercial opportunity opened and the gold rush was on. Debt settlement, unlike debt collection, is not regulated. The Attorneys General who have sued these companies have used fraudulent advertising and business acts as the most effective means of winning convictions.

Despite the claims of greatly reducing your debt and keeping the consumer out of bankruptcy, debt settlement firms actually can increase your total money spent and completely trash your credit record. In some instances it would be a wiser move to file for bankruptcy rather than use one of these firms.

The fact that they are in the process of “settling” your debt does not change your status with the creditor. As payments are continued to be missed the creditor continues to pile on late fees and other penalties. Collection calls and letters continue. One West Virginia couple saw their fees go from $8,000 to $24,000 while over the same time they had paid nearly $4,000 to a settlement company.

What they charge is usually dependent on how much you owe. Typically they will have an up front fee and then a monthly fee while they “settle” your debts. Where does the money come from? From that special account the consumer opened to create the war chest.

The good news is there are alternatives. The bad news is there is no quick fix. If you are half way savvy about credit repair and you have the patience of Job there are do it yourself kits that can work. If you are like most Americans and you don’t have a clue, there are legitimate credit repair firms who can get results and are affordable.

Do yourself a favor though. Avoid the “debt settlement” come-ons.