Debt Settlement Companies: Stay Away
You have a lot of debt, and you may be considering bankruptcy. But that seems like a drastic step when there are so many ads on TV and online touting to just resolve your debts without bankruptcy. So what’s the better option—bankruptcy or a debt relief company?
What Do Debt Settlement Companies Do?
Debt relief companies—sometimes called debt settlement companies—operate (or promise to operate, as they don’t always do what they say they will) by promising to reduce or even completely settle your debts. In most cases, they will require that you make a payment to them, which they say they will then distribute to your creditors.
They promise that they have negotiated with your creditors to accept far less than what you owe them. So, they say that you make your payment to the company, and the company gives a little of that payment to each creditor (and some to itself, as payment for its serviced). In time, these services promise your debts are resolved. Some even promise that your debts will be completely wiped out.
Promises Aren’t Kept
But in many cases, these companies do not negotiate with your creditors, or worse, they do not distribute your payments.
Sometimes these companies request huge initial startup fees, none of which goes to any of your creditors. If they are being paid from the monthly payment that you are making to them that is supposed to go to pay down your debts, these companies will often ask for permission to withdraw directly from your bank. Unscrupulous companies will then refuse to honor requests to stop services.
Whatever they change and however they charge, they will often ask for up front payment, when legally, they are only supposed to be paid when they have completed work on your behalf. Few companies abide by this requirement.
They often advertise about “new government programs” that are supposed to help people who owe money. Some even offer prizes to you, like a free trip somewhere, once your debts are paid off.
Making Things Worse
Debt resolution companies may actually encourage you to go into default on debts or with creditors that you are actually current with. They will sometimes tell you to stop communicating with your creditors, leaving you in the dark about what is being paid to who. All of this means that they are making your financial problems worse, instead of helping.
Additionally, even if these companies did actually do what they were supposed to, they only help you with unsecured debts, such as credit card debts or medical expenses. They won’t help you with secured debts such as mortgages or car loans.
The debt settlement industry is full of scammers and fraud. Bankruptcy is the best way to make sure you are discharging debt, permanently, and doing it the right way.