Why Debt Settlement Companies Are Often Scams
If you are thinking of bankruptcy, another idea may have come to mind, either on your own, or because of an advertisement that you saw or read: Debt relief companies. These companies can seem like they are a great idea, but in reality, they are not only a poor alternative to bankruptcy, but can actually leave you in bigger financial trouble than you started out in.
What Debt Settlement Companies Say They Will Do
Most of these companies promise to settle your debt for a small fraction of what you owe. Some may even promise to wipe out some of your debt, a promise that, in almost every case, can’t be legally fulfilled.
Many will promise to work out payment plans with your creditors, promising you that for one, small, affordable monthly payment, you can pay off all your debt. Simply make the monthly payment to the settlement company and they will distribute the payment to your creditors.
Many will tout non-existent “government programs” that will help you, and some go so far as to give out prizes or trips when your debt is paid off.
Look Beyond the Promises
These programs are not what they seem. First, many creditors will not negotiate anything with these companies, and if they do, they are not offering anything more to these companies than you could negotiate on your own.
More troubling is the payment that you are making to the company. In many cases, a large percentage of your payment is going to pay the debt settlement company—it is not going to pay off your debt. So, even if you assume the debt settlement company did reduce your balances somewhat, that reduction is worthless, as you are now having to pay the debt settlement company.
As you can see, because part of your payment is going to the debt settlement starting with your first payment, the company is getting paid from the beginning—before they have done any work and before they have forwarded any money to any of your creditors.
Bank Account Access
Often, these companies will require direct access to your bank account in order to withdraw the agreed-upon payment. Should you opt to cancel the service, you may have problems getting them to stop accessing your account.
And, if you stop services, you may be surprised to learn that little if any of the money you did pay to the service ever actually went to any of your creditors. Many consumers are served with collection lawsuits from the exact same creditors that these settlement companies were supposed to be paying off.
Worse, many companies will actually encourage you to go into default (stop paying) whatever creditors that you are currently with. This is never a good idea.