Debt settlement companies not might be what they are cracked up to be.
While these companies offer the promise of substantial reductions in a consumer’s debt load, they also require consumers to default on all these debts.
A cascade of problems can follow, which include:
• late fees, default interest rates, and penalties;
• debt collection ending in lawsuits and wage garnishment; and
• far lower credit scores guaranteeing high rates on future loans.
Our good friends at the Consumer Federation of America say
consumers seeking assistance from debt settlement companies are essentially playing the lottery, only instead of risking only the modest cost of a ticket, they are in great danger of substantially worsening an already difficult financial situation.
Debt settlement companies take advantage of consumer desperation by offering seemingly magical solutions to financial problems – creditor approval of sharp reductions in substantial debts. But these reductions do not occur unless creditors agree, and they often do not. Consumers have no way of knowing up front if creditors will agree to a debt reduction or, instead, will impose fees that increase total debt.
For some consumers, the debt settlement company settles some debts, usually charging high fees, but the remaining debt load balloons as creditors hike fees and interest rates. Even when debts are settled, consumers are often surprised to learn that they have incurred debt-cancellation income tax liability.
Some companies have attempted to “legitimize” their work by forming an association, the American Fair Credit Council, which purports to have created standards and conducts annual on-site audits of “accredited companies.” Yet, a review of Better Business Bureau and consumer complaint websites reveals complaints against all seven accredited members, and a relatively large number of complaints against one accredited member, Freedom Debt Relief, that also claims to be the largest debt settlement company.
There are usually no simple solutions for individual consumers burdened with large debts, but some solutions are better than others. CFA recommends that these consumers consider seeking advice from reputable, nonprofit credit counseling agencies, some of whom have local offices. These agencies have well-established relationships with major creditors and can help work out payment plans that are affordable. If, however, the debts are too large for these plans, consumers should consider filing for personal bankruptcy.