One of the most dangerous forms of debt relief that we caution people about is debt settlement offered by for-profit companies. We are certainly not alone in offering this cautionary advice, as there have been scores of trusted financial news sources and even federal regulators that share our concerns. Debt settlement companies often promise quick relief and that they can help you settle your debt for less than you owe. They will negotiate on your behalf so that you can pay only a small portion of your debt. The catch is even if it works and the creditor accepts an offer, it can wreak havoc on your credit and your wallet for years to come.
Debt settlement negotiations only work when a creditor believes that you won’t end up paying at all if you can’t reach an agreement on how much debt should be forgiven. To try to engineer the negotiating process in your favor, the debt settlement company may tell you to stop making payments, so you become delinquent. Making matters worse, these schemes often involve bad advice that encourages you not to communicate with the lenders you owe while you are withholding payments. This situation is complicated even further if they trick you into giving them power of attorney over communications with your lenders. Instead of paying the accounts you owe, the debt settlement company may ask you to pay them instead so they can build up a savings account with the goal of having enough to cover a lump sum payment to the creditor if they agree to a settlement.
One problem is this action damages your credit score and places you at risk of further, more serious debt collection actions.
If you weren’t already behind on your debt payments, when you stop making payments your creditors will report the delinquency to the credit bureaus and this will cause your credit score to tank. These negative marks will remain on your credit report for seven years.
On top of ruining your credit, there is no guarantee that the creditors will actually be able to negotiate and reach an agreement that is favorable. According to a study by the Center for Responsible Lending, in order for debt settlement to be worth it, you will need to successfully negotiate at least four credit accounts. If no agreement is reached, you may end up being sued or even having your wages garnished until the debt is paid back in full.
We received a difficult question from a submission in our #AskanExpert from someone who signed up and had made on-time payments to a savings account since last November and was now being sued on two of the delinquent accounts.
What can you do if you regret your decision to trust a debt settlement company and aren’t seeing the results they promised?
- Reach out to your creditors and let them know the situation. You can tell them you have been working with a debt settlement company and would like to try to negotiate yourself. The important thing is to communicate!
- Contact the debt settlement company and let them know you want to get out of the agreement and would like a refund. Let them know you would like a refund in a reasonable amount of time. If they do not comply, you can file a complaint with the Consumer Financial Protection Bureau, Better Business Bureau and the Federal Trade Commission.
- Know your rights! Debt settlement companies are not allowed to charge fees upfront or collect any fees until a debt is settled under the Federal Trade Commissions rules that took effect in 2010 that protect consumers from abusive industry practices.
- Reach out to a nonprofit credit counseling agency. They will be able to review your total financial picture and provide what options are available to get your credit back on track.
It will take some time to fix and improve your credit but there is help available.
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