If you are thinking about entering into a Debt Settlement program you need to be very careful. In fact, as a Credit Counselor I am personally aware of only a few companies out of the thousands that advertise Debt Settlement on the internet that I would trust to do a settlement. I base my judgment on what I’ve seen with my own eyes. I worked very briefly for a company that did Debt Settlements and I have seen the misleading, hard sell and the devastation that can result from trusting these companies. If you are in a position that warrants settling accounts I discuss how you can do this very effectively on your own on the page Negotiating Debt with Your Creditors.
The first thing that I want to stress to you is that Debt Settlement is not Debt Consolidation, not even close. I am shocked at the amount of people out there that are under the impression that it’s the same kind of program and that creditors willingly work with settlement companies. Lets start at the beginning and let me tell you exactly how most Debt Settlement companies operate.
Keep in mind that you will most likely be speaking to a “Certified Credit Counselor” after you fill out your online application. Right off the bat the hard sell begins. Believe me folks, being “Certified” in this field doesn’t mean squat. When I took the test I never even opened the text book and I passed.
Those certifications cost the Credit Counseling companies a few hundred dollars per employee and the tests are not given by a government agency, they are private companies just like the Credit Counseling companies. The Credit Counseling companies require that their employees become certified so that they can advertise the fact on their websites and paperwork and meet some of the creditors requirements so that the creditors will work with them. It’s a misguided attempt on the creditors part to work with legit counselors, if only they knew. These so called “Certified Credit Counselors” are sales people who generally work on a commission basis with bonuses awarded for the number of new clients (deals) brought in for the month. Sad but true.
OK, so you’ve given the Counselor a list of your accounts. The accounts need to be unsecured debt and they are supposed to be in a charged off status (R-9 on your credit report). The company that I worked for didn’t care if they were charged off or not because they would be before they got around to settling them. (Honest to God, that was the attitude in the sales office!)
A small payment is calculated for each account and these payments plus a monthly service fee that goes into the counseling centers pocket each month are added together and presented to the potential client as their monthly payment. Often times the Counselor will offer several different payment plans that will get the accounts paid off in different amounts of months. The company I worked for offered 24, 36 or 48 month plans.
After a comfortable payment is decided upon the counselor then explains that the payments that the client sends in each month do not immediately get paid out to the creditors. Instead these payments are put into a bonded savings or trust account until enough money is accumulated to offer the creditors lump sums of cash to “settle” the account all at once. The Counselor usually suggests that the creditor will accept 40 to 50% of the total amount of the debt.
By this time the client is usually a little hyper because they have just realized that they will be making monthly payments and nothing will go to the creditors for months and months possibly years. The Counselor then calms the client down by saying don’t worry, this is perfectly legal and we get paperwork out to them letting them know that you are on a settlement program. They (the creditors) know how the game is played! You would be shocked at how easily that lame pitch works on people who are feeling desperate and afraid of their situation, it’s pure evil.
So the money goes into an account and nothing but a piece of paper from some Settlement company goes to the creditor. Here’s something to think about, what are the creditors charging a monthly service fee for? What service are they providing while they take your money each month?
Speaking of fees, the Counselor has to work into their pitch the HUGE start up fee that the client has to pay before any money goes into the special bonded savings account. I’ve seen fees of $2000, $3000 and some really nice Settlement companies allow clients to just forfeit the first 2 or 3 payments as the fees, to make it easier… I seriously hate these Settlement scams.
Now let me tell you what’s going to happen to you if you decide to go this route. The first thing that will happen is that your phone is never going to stop ringing. The creditors are going to hound you day and night. They are going to find out where you work and call you there, they will call your relatives and some of them may call your neighbors and leave embarrassing messages with them. You may also be dragged into court and have your wages garnished. Your life will be hell. Most people drop out of Debt Settlement programs within the first 4 months because they can’t take the stress.
If this happens to you and you call the Settlement company to complain about the harassment the Settlement company will probably never call you back. You will be frustrated, afraid, angry and alone. Many, many people quit paying the Settlement company and immediately file for bankruptcy.
Some folks use the rational that they are trying to clean up their credit once and for all and the creditors quit calling them several years ago so they aren’t worried about any of this. My answer to that is if you haven’t paid on these bills in years the accounts are most likely in R-9 status on your credit report so why wouldn’t you just wait for the 7 years to be up and let them fall off of your credit on their own? Why do you want some scam company to open the whole thing up as a new R-9 on your credit so that the 7 years starts all over again?
Also another bit of information that the Settlement company will probably not offer to you is that you will be issued a 1099 form from the creditor on the debt that you settle. In other words, if you settle a $10,000 debt for $5,000. you owe Uncle Sam income tax on that $5,000. Surprise!!!
These are the facts. Sound good?