Get Out of Debt! Pay Only Pennies on the Dollar!
I've been seeing tons of advertisements online for these so called "debt relief" companies promising to eliminate your debts for "pennies on the dollar".
It's certainly an appealing offer, but does it work or is it just another scam?
What These Guys Do
While the process may vary from one company to another, they all effectively operate under the same principle. They negotiate with your creditors in hopes of "settling" your debt for some fraction of the total amount owed.
What They Need to Do It
First of all, they need something to offer, i.e. a lump sum of cash. They also need you to get a few months behind on your bills, because creditors will not negotiate if you are current on your account.
That doesn't sound so bad right?
Not until you actually delve into the process.
How They Do It
In order to get the cash together and get you delinquent on your account(s), they first thing they will tell you to do is stop paying your monthly bills. Instead, you begin paying the debt relief company monthly. They then open up an interest bearing account on your behalf into which your monthly payment will go.
"Catch" 1: The Debt Relief Company "Earns" Their Fees First
When you begin making the monthly payments to the debt relief company, they FIRST collect their fee before putting ANY money into your account. Typical fees are a few thousand dollars, so more often than not their customers will make payments for six months or more and have nothing to show for it.
Now, depending on how much debt you owe and what the companys' fees are, it will probably take over a year of payments before you have enough cash for them to negotiate/settle your debts.
"Catch" 2: You Will Be Hounded by Creditors and Sued
What do you think your creditors are going to do when they haven't received a check in months? They will sue you. Now, technically, only a law firm can offer "fees first" debt relief services, so the company will need to at least have an attorney on staff. In the best case scenario, this attorney would represent you in these lawsuits. In the worst case, you're going to have to deal with it on your own.
Hopefully, after a year or so, you will have enough case in your account to start the settlement process. This is not complicated. The company will call your creditors, and make them an offer, usually around30-40% of what's owed. Most credit card companies and other creditors will usually settle for around 50% if they believe that's all their going to get.
"Catch" 3: No Creditor HAS to Settle
There is no reason a creditor can't simply say, "No, I want ALL my money". They have the legal advantage and they don't have to accept anything other than the entire amount. That being said, most don't want all the hassle of lawsuits and a full blown trial, so they will usually settle. However, some creditors are cracking down by accepting only 60% or more. At that rate, all the effort really isn't worth it.
Finally, assuming all goes as planned, your debts are settled and your all done right?
Wrong.
"Catch" 4: You Will Get a Bill from the IRS for "Forgiven Debt"
Many people don't realize this, but the creditors write the forgiven debt off on their taxes as an expense. Every business expense is income for some other party. In this case it's you. All of a sudden you now owe the IRS a few thousand dollars, and the IRS is a tough creditor. Even bankruptcy can't usually help with IRS debt.
The End Result
In effect, you've settled your debt for about 50%, but with the IRS issue, it's really closer to 65%, and it took probably two years worth of creditor harassment and lawsuits. Not to mention, having all those "debt forgiven" line items on your credit report is just as harmful as a bankruptcy would have been. However, if you'd file for bankruptcy instead, you would have been done in only three months, had ALL your debt discharged and you would already have your credit back.
These companies claim to help you avoid bankruptcy by using a debt settlement plan. Hopefully if you've followed along you will realize that it should be the other way around. Bankruptcy can help you avoid this nightmare debt settlement situation.
Don't fall for it! You can settle your debts on your own. I successfully negotiated with three credit card companies, and all accepted a 50% settlement, except American Express. They wouldn't take less than 70%.
ReplyDeleteIf you talk to them after you've been delinquent for a few months, you'll find that they are receptive to debt settlement. However, this post is correct, in that they won't talk to you if you are up to date on your bills.
They assume that some number of credit card holders will be unable to repay their debt, and they have a plan in place to deal with it, which includes guidelines on accepting settlement offers.