April 10, 2012

Be Cautious of Debt Settlement Companies

The radio commercials and online ads make them sound so tempting: a chance to reduce or wipe out completely credit card debt.

But are debt settlement companies really worth it? Can they do what they claim?

The Federal Trade Commission says debt settlement companies, typically offered by for-profit companies, are in many cases not a good option for eliminating debt.

Debt settlement programs typically involve the company negotiating with credits to allow card holders to pay a “settlement” to resolve their debts. Debt settlement companies have clients set aside a specific amount of money every month, which is placed in a special escrow-like account until it accumulates enough savings to pay off a settlement.

The FTC says debt settlement companies can be risky ventures, and has issued the following warnings:

Debt settlement companies often require clients to deposit money in a special savings account for 36 months or more before their debts are settled. Many people have trouble making the payments long enough to get their debts resolved and drop out. Review your budget closely to ensure you are financial capable of setting aside the required monthly amounts for the full length of the program before you sign with a debt settlement company.
Creditors have no obligation to agree to negotiate a settlement of your debts. That means there is a possibility the debt settlement company won’t be able to settle some of your debts even if you set aside the monthly amount the program requires.
Because debt settlement programs often encourage clients to stop sending payments directly to creditors, your credit report may be adversely impacted. For example, debts may continue to accrue late fees that put you in a deeper financial hole. Creditors or debt collectors may request repayment or sue you, and if successful in the lawsuit, they have the right to garnish your wages or put a lien on your home.
Beware of debt settlement scams. Some debt settlement companies engage in deceptive practices failing to deliver on their promises or “guarantees” to settle all of your credit card debt for say 30 to 60 percent of what you owe. Other companies may try to collect their own fees before they have settled your debts, a practice prohibited by the SEC.
Some debt settlement companies fail to explain the risks of their programs. Many fail to acknowledge that many consumers drop out without settling their debts, that consumer credit reports may suffer, or that debt collectors may continue to call you.

The FTC says to avoid debt settlement companies that promise to settle your debts if the company does any of the following:

Charges any fees before it settles your debts
Touts a “new government program” to bail out credit card debt
Guarantees it can make your unsecured debt go away for pennies on the dollar.
Doesn’t explain the serious consequences on your credit.
Tells you it can stop all debt collection calls and lawsuits.