Debt Settlement Warnings!

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Debt Settlement Warnings!

If you're thinking about using a debt settlement service to help you get out of debt faster and save money on your monthly payments, make sure you do your homework before choosing a company. There are definitely shams and scams out there.

Firstly debt consolidation is not the same as debt settlement or debt negotiation, which most people don't realize.  Debt settlement companies charge hundreds of dollars as an initial admin fee to set up your account, plus a monthly service fee. The fees vary depending on the company and the amount of your debts. Such companies take your money every month, but don't make monthly payments to your creditors! Instead, they put it in a trust account, negotiate your debts with your creditors, then make a lump-sum payment when there's enough in your account to pay a creditor in full. That can take years depending on the amount of debt you have with each creditor. Meanwhile, you can be sued by your creditors and your wages can be garnished! 

Debt Settlement companies don't ask your creditors to stop all interest, late fees or over the limit fees from accruing. That means while the debt negotiations are ongoing, your debts will continue to grow! So if you're sued and a judgment is brought against you, you'll owe more money than before!  Plus shoddy debt companies, which there are a lot of, don't tell you any of this up front. It's called getting permission by omission because they simply don't tell you how their program works before you sign an agreement with them. Or after, for that matter. But if you ask the right questions, eventually you'll figure it out. 

Here's an example of how debt settlement works.

Let's say you have $20,000 in unsecured credit card debt. You owe $10,000 to one credit card company, $6,000 to another and $4,000 to a third. You agree to a 5 year plan where you pay $250 a month to the debt settlement company. (After all, $250 a month for 60 months is only $15,000, so you're saving $5,000 and you'll be debt-free in 5 years, right?)

The debt settlement admin fee will cost you $750. Your first 3 monthly debt payments go towards that and nothing gets put into your trust account until your 4th month. The debt settlement company keeps $50 of your $250 payment each month for the service fee. That means $200 a month is being added to your trust account.

Most debt settlement companies claim to be able to negotiate your debt for about 50% of what you owe. So let's use the lowest credit card debt as an example...

If you owe $4,000 and your creditor agrees to accept $2,000 as payment in full, it will take 10 months at $200 per month to have enough in your trust account to pay off just that one credit card. But remember, your first 3 payments to the debt settlement company only paid them their the admin fee. That means your first credit card settlement is 14 months after you started sending the the debt settlement company money.

So what's the problem? It's simple. Your creditor won't agree to accept half of your actual debt unless, or until, it can be paid in full. Otherwise, you're expected to make your normal monthly payments. Since you don't have $2,000 in your trust account, and you won't have it until more than a year after you stopped paying your creditor directly, they'll probably take you to court and request that your wages be garnished long before you have that $2,000 built up.  And what about your other creditors? Well, they'll be waiting even longer to get their money from the debt settlement company. The $6,000 debt will take 15 more months to pay off, assuming your creditor waits that long and agrees to 50%. And that $10,000 bill? You do the math.

On the other hand, if you signed up for a 3 year plan with the settlement company, your debts would be paid off sooner. But, the question is, will your creditors wait that long? Probably not. The facts are, you can negotiate with your creditors yourself. Most will agree to take a smaller monthly payment from you and stop all interest and fees from accruing. And, of course, you'll save thousands of dollars in fees to the debt settlement company. Before signing up for any service, please be sure you check out the company thoroughly. And don't let the words non-profit fool you either. A lot of debt settlement companies claim to be non-profit. Going back to the example above, if you pay them $15,000 over a 5 year time frame and they settle your debts at half of what you owed, they'll make $5,000 from you. I'd call that a profit, especially since they might not have actually helped you in anyway.

Most debt settlement companies will allow you to cancel your account and get a refund of what you've paid, less the non- refundable admin fee and the monthly service fees. If you feel you've been mislead about their debt settlement program, file a complaint with the Better Business Bureau or hire an attorney.

You can visit the Better Business Bureau's website ( and find reports on hundreds of companies. Here's the link to the BBB... BBB link here.

At My Consumer Debt Consolidation Inc., we only work with approved debt consolidation organizations and we are confident that we will be able to help you to develop a Debt Consolidation Repayment Plan that will fit your budget and help you to reach your goal of becoming DEBT FREE! Remember THERE IS LIFE AFTER DEBT and we will help you get back on track.

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