By Kitty J. Lin
Many consumers today are struggling to make ends meet. They live from paycheck to paycheck and have creditors hounding them to pay for debts with money they do not have. It does not help that they are bombarded with radio ads and television commercials promising to help them settle their debt for pennies on the dollar. The consumers see or hear these ads and think they have found the solution to their problems. But do these debt settlement companies really live up to their promises and actually help consumers? According to the U.S. Government Accountability Office, their investigations have found that a lot of these debt settlement companies use fraudulent and deceptive practices and poses a significant risk to consumers. As a bankruptcy lawyer I have heard many horror stories and I want to highlight some of the dangers of these debt settlement companies. Hopefully you will be able to make an informed decision on how you can manage your debt.
Settle for Pennies on the Dollar
The claim that these debt settlement companies can settle your debt for pennies on the dollar is the main draw for most consumers when they hear this. They think that they are getting the deal of a lifetime. They are willing to pay some company to help them settle their debts and pay a monthly sum to do so. The problem with these claims is that in order to settle the debt these debt settlement companies advise you that you have to stop making your monthly payments first. If you were paying these companies on time and you suddenly stop, your interest rates will increase and you will soon have penalty and late fees tacked on to your balance. Additionally, not all creditors are willing to participate in these debt settlement programs, so you will have to deal with the nonparticipating creditors on your own. For the creditors that are willing to settle the debt with the debt settlement companies, the next issue is how much are they willing to settle for. Contrary to the debt settlement company’s claims, not all creditors are willing to settle for pennies on the dollar. It depends on the amount of debt you owe and how desperate the companies are to settle. In most circumstances you could have settled the debt on your own for the same amount without having to pay a debt settlement company to do it for you.
Be Debt Free in “X” Months
Debt settlement companies promise that if you pay a certain dollar amount to them every month for who knows how many months you will be completely debt free. The number of months can vary depending on the amount of debt. The most common debt settlement program takes the money you pay them and puts it in a separate account. Every time there is enough money in the account they can then try to settle one of your debts. In the meantime the credit cards that are not getting paid continue to increase the balanced owed with interest and late fees. Eventually one the credit card companies will sue you. I had a client that came into my office crying because she was promised that she would be debt free if she paid $1,000 a month for 36 months on her $60,000 debt. She did not receive a statement from the debt settlement company during the 30 months she paid the $1,000. Later she requested the debt settlement company provide a statement to her so she could see how much debt she still owed. She thought she was almost done with the program since she only had 6 more months to go. To her surprise, the balance she owed on her credit cards was HIGHER than when she first started the program. This was after she had already paid $30,000 into the program. Where did her money go? She was out $30,000 and her debt situation did not improve. In fact, her situation had gotten worse. She should have spoken to a bankruptcy attorney and save herself $28,000.
The debt settlement companies make filing for bankruptcy look like the worst possible solution to a consumer’s debt situation. They do not tell you that their debt settlement program will ruin your credit because you are paying less than what you owe on a debt. The really horrible part is that some debt settlement companies also file bankruptcy cases for their clients. So first they tell potential clients that bankruptcy is bad and you would try our debt settlement program. Then when the debt settlement program does not work after collecting months of fees, the debt settlement company markets the client to use them to file bankruptcy and make all the debt go away forever. These debt settlement companies are just bleeding clients dry from all sides. Additionally, if you settle a debt for less than what you owe you can receive a 1099-C and be required to pay taxes on the money that was forgiven or cancelled. That diminishes much, if not all, of the savings you gained by settling the debt. When you file for bankruptcy you will not have to pay taxes on the amount discharged..
A lot of debt settlement companies claim they are nonprofit agencies, but you need to verify they are actually nonprofit. Just because they say they are nonprofit doesn’t actually mean they are.
So what are some alternatives to debt settlement programs? If you only owe a couple of creditors the best thing you can do for yourself is to try to negotiate with the creditors by yourself. You can save yourself a lot of headaches and money by doing it yourself. Yes, it does take a little bit more of your time, but at least you don’t have to pay any money for it. If you owe a lot of creditors or if the creditors are not willing to settle for an amount that you can repay comfortably, bankruptcy is another option. Bankruptcy discharges all of your eligible debts forever by federal court order and gives you a fresh start. You can consult with a credit counseling agency approved by the U.S. Trustee for more ways to manage your debt.