Should You Ever Agree to Debt Settlement, Part One

Have you heard that there could be a way to pay less than the amount of a debt that you owe?

You may have even heard this on the radio or seen ads online. For-profit debt settlement companies will advertise that they can negotiate with your creditors to allow you to pay a “settlement” to resolve your debt which is less than the full amount you owe, according to the Federal Trade Commission (FTC).

That sounds like the perfect solution to your debt problem but the FTC points out there are many complications with these companies that can actually worsen your debt, your finances and your credit.

A warning from the Office of the Comptroller of the Currency states, “You cannot eliminate an obligation to pay a debt, simply by paying someone a fee regardless of the amount you owe.”

From personal experience, I can tell you there are better ways to accomplish paying less to pay back your debts and get them paid off.

Here’s what you need to know.

Problems with debt settlement companies

Both FTC and the Consumer Financial Protection Bureau (CFPB) have fielded an overwhelming amount of complaints from consumers about debt settlement companies so I’ve outlined some of the many risks in working with a debt settlement company.

• You pay the debt settlement company all the money before debts are settled. Most of these companies operate by setting up an account for you to deposit money into so you can accumulate enough money for the company to negotiate a settlement with your creditors.
• Debt settlement companies charge fees. These services are for-profit and they charge higher fees (for each debt settled) than other options you have for settling your debts. According to the CFPB, charging upfront fees for these services is generally prohibited by existing law.
• Debt settlement can take several years: Typically these payments last for 3 years or more. But life is unpredictable and you run the risk of not being able to keep up with those payments. If that happens you can be dropped from the program before any debts are settled.
• Collection agencies are not obligated to settle debts for less than you owe. There is no guarantee your creditors will accept a settlement or that your debts can actually be settled.
• Debt settlement companies try to settle small debts first. That’s because you can accumulate these amounts quicker and pay off small debts faster. But, the settlement does nothing to stop interest and fees from accruing on large debts which actually causes your debts to keep growing while you are accumulating settlement amounts.
• You stop paying and communicating with the creditor. Debt settlement companies require you to send payments to them and any of your creditors who do not agree to the program will continue reporting you delinquent or defaulted and even try to continue calling you or even suing you to collect the debt. Also, your credit score will tank if that happens as you will be reported as defaulting on a credit account, even though you are making payments to a settlement company.
• There are a lot of debt settlement scams. If the companies charge you their full fees before settling debts or make promises they can’t deliver or guarantee or offer to settle your debts for outrageously low amounts, beware of scams.

Better ways to settle debts legitimately

You have some other options to settle or pay off your debts for less money in legitimate ways.

• Settle for less with collections agencies directly using a lump sum payment. If you receive a tax refund, inheritance, insurance settlement, gift, bonus or any type of windfall, you can call up the collections agencies for your loan debts, credit card debts and even medical debts and directly ask them yourself if they will accept a lesser amount if you paid a lump sum. Many times creditors may agree to accept less than owed and you would be doing this to pay less than you owe and also to get them agree to report your account as “satisfied” or “paid as agreed” to the credit bureaus.

You’ll want to do this with the newest debts first (if you have several) as these are hurting your credit report the most. Be aware that if old debts in collections have fallen off your credit report (7 years after the date of the last payment) or they are beyond your state’s statute of limitations for creditors to collect on the debt that you may not need to pay it at all. Any payment on that type of old debt resets that statute of limitations allowing the creditor to begin collecting on the debt and reporting it to the credit bureaus again.

• Enter a debt management program. A debt management program is not a debt settlement company and instead is managed by a legitimate non-profit credit counseling agency (visit the National Foundation for Credit counseling agency locator tool, to find a reputable local agency) whose mission is to help you pay off your debts for free or a very low fee, depending on your income. Either in person, over the phone or online, a credit counselor reviews and evaluates all your income, debt payments and fixed expenses to figure out what payment you can afford to make to the agency which they will disburse to your creditors every month. These reputable non-profit agencies have agreements and relationships with most credit card and other loan companies and will additionally negotiate reduced fees and interest rates to allow you to pay off your debt faster for less money, as long as you stick to the program.

Not only can you get your debts paid off as quickly as possible in a way you can afford, but you also exit a debt management program with improved credit as all your debts are reported, “paid as agreed” for the duration of your program. You may find you can be approved for a mortgage or a car loan after successfully completing a debt management program.

Remember: Debt settlement costs money in higher fees and higher interest payments and creditor fees with no guarantees debts can be settled and can hurt your finances and your credit. A debt management program works legitimately with your creditors first and may cost very little or nothing while it improves your finances and your credit if you complete the program.

Now that you know how debt settlement companies can hurt your finances and the difference between debt settlement and a reputable debt management program, you will never fall for a debt settlement scam.

Have you already been sued by a debt collections agency to appear in court? Read Part 2 of “Should you ever agree to debt settlement?”