Is Debt Settlement For Real, Or A Real Rip-off?
Many would argue that Debt settlement companies don't do a single thing that you could not do yourself
. This is, in fact, true.
Others would say that using a debt settlement company for many is worth the money they charge to eliminate at least some of the responsibility of settling unsecured debt. Depending on your perspective that's also true.
So what is the truth? Is it, as they say, somewhere in the middle?
Let's take a look at a real life example.
Mike owes almost $42,000 in unsecured debt, in this case credit cards and a personal loan. He contacts the XYZ debt settlement company and is told that he qualifies for their debt settlement program because he has more than $10,000 in unsecured debt and has had several recent set backs (loss of income and unexpected expenses, etc.). So he signs up with XYZ and stops making all credit card payments
What they don't tell him is that nearly everyone with enough debt qualifies. Why? Because if you owe somewhere in the neighborhood of $10,000 or more they will make enough money to take you on as a client.
Mike's arraignment works like this; he will open a separate savings account and for the next 36 months he will make a direct deposit to that account. The first four months he pays $629 a month...every cent going towards fees by XYZ debt settlement. For months 5-16, he pays $641 a month, half of that goes to XYZ debt settlement for fees and the other half staying in the savings account to grow. After the 16th month XYZ has been paid all of their fees (more that $6,000) so from months 17-36 the entire $641 stays in the account as you build a war chest for XYZ to start negotiating with those less-than-happy creditors.
In the end instead of Mike paying off $42,000 in credit cards he will only end up paying about $23,000 total, with about $6,000 of that going to fees. Wow. Seems like a great deal, right? XYZ has sold Mike on the idea that this is the alternative to bankruptcy. Sure, you'll take a big hit on your credit but that was going to be the case anyway, right?
Soon after Mike stops paying his credit cards the collection letters and phone calls start. ZYZ can't do anything about that except to tell him to expect it and what he should and should not say. Some agencies do say they will field the collection calls but legally the original creditors can still contact Mike and many will. The second month Mike is getting five to fifteen calls a day and a lot of extra mail. After the banks give up they turn it over to their collection departments. If the collection department can't collect, they throw in the towel and will typically unload the debt to a third party collection agency. XYZ will tell you that this is what you want to happen because the collection agencies will want to negotiate that debt and collect something, even if it is only forty or fifty percent of the total owing. After about a year, Mike and XYZ may be in a position to settle one or two of the smaller accounts.
Here are some things to consider when considering debt settlement.
1. No matter what the debt settlement agency tells you, you will get calls from debt collectors.
2. There's nothing to stop a collection agency from taking you to court. True, most would rather settle but you should think about what you will do if you receive a summons.
3. Banks and collection agencies do not just offer lower balance settlements to companies like XYZ. In fact, most of the time you will get a letter offering to reduce your balance by 40 or 50 percent, often times with reasonable payment plans.
4. You might have to pay taxes on the canceled portion of the debt. That's right, if you have a positive net worth you may have to pay taxes on the money you saved.
While some debt settlement companies may offer legitimate services to your debt, a serious lack of regulation has made it almost impossible to sort out the good from the bad. Be very careful if you decide to enter into an agreement with a debt settlement company. While congress ponders a number of laws to better regulate this industry, it is still the Wild West out there when it comes to debt settlement.
by: Jamie Hanson
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