Does debt settlement really work?
Some companies that offer to help you settle your credit card debt for less are not what they claim to be.
The ads for credit card debt-settlement companies make it sound pretty easy: If you have $10,000 or more of credit card debt, these firms say they can negotiate with your lender so that you can walk away from all but a small percentage of the money you owe.
Are these promises on the level? The Better Business Bureau calls the debt-settlement industry one fraught with "inherent problems." That's a diplomatic way of saying some of these companies are outright scams. In recent months several have been targets of legal action by state attorneys general.
The typical debt-settlement business model requires an upfront payment from a distressed consumer. For that payment, the company agrees to negotiate on the consumer's behalf with the credit card company.
Sometimes the company makes an effort to negotiate a reduction in debt. Sometimes it simply disappears with the money, leaving the consumer with less money and more debt, along with a severely damaged credit rating.
- Calculator: How much debt is too much?
But a debt-settlement firm that says credit card companies will negotiate a lower balance isn't necessarily lying. Lenders will, in some cases, do just that. However, the consequences for the consumer aren't particularly pleasant and need to be weighed against paying off the legal debt.
Expect more collection calls
To begin the process, the consumer stops paying his credit card bill for at least six months. Almost immediately the collection calls begin and the consumer's credit rating takes a hit.
At the end of six months the credit card company will likely write off the debt as a loss. However, you will still legally owe the debt and your credit score falls even further. It is at this point that credit card debt-settlement companies say they go to work, negotiating with your credit card company to agree to lower the amount owed, in exchange for the agreed-upon amount to be paid.
However, the Federal Trade Commission says it can take years for these debt-settlement firms to get around to negotiating with your lender. In the meantime, late fees and interest are accumulating. Oh, yes -- those calls from collectors will continue. In fact, the credit card company might sell your "uncollectible" debt to a more aggressive debt collector.
Should you decide to go the debt-settlement route, the FTC says you would be much better off negotiating with the credit card company directly. You would save the large upfront fee and the percentage of the reduced debt the company usually demands as a final payment.
Seek good advice
Before taking that step, however, the FTC suggests you consider the move carefully and get expert advice. Reputable credit counseling organizations advise people on managing money, bills and debts, help them develop a budget, and usually offer free information and workshops.
They should discuss your entire financial situation with you, and help you develop a personalized plan to get you out of the hole. Finding reputable credit counselors has recently become more convenient because the new credit card law requires credit card issuers to include a toll-free number on their statements that directs cardholders to information about finding nonprofit counseling agencies. The federal government maintains a list of government-approved organizations, by state, at the Web site of the U.S. Trustee Program.
Debt-settlement companies that make the process sound simple and relatively painless should be avoided. According to the FTC, some "red flags" include ads that tout some alleged government program or "guarantees" it can reduce your debt or make other promises. However, the biggest tip-off of all is the requirement that you write a large check to them before they start work.
Related reading at ConsumerAffairs.com:
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