Debt Settlement Companies: Evil Or Enlightened?

Here’s the deal. I have been in a situation before when I very seriously considered hiring a debt settlement company. I know how extremely enticing they can seem. I know how it feels to not be able to think about anything else other than your debt, and how behind you are, and how much you owe. I know how it feels! I understand how all-consuming it is.

And I know how, when you first hear of the idea of what a Debt Settlement Company says they can do for you, I know how it feels like a breath of fresh air. Like they’ll help you finally be able to take a breath for the first time. FINALLY you’ve found a solution, something that’s finally going to help you get out of this situation. I remember thinking, “Why didn’t I know about this before? I could have been well on my way by now!”

But here’s the other thing I know: I am so, so, SO happy that I didn’t hire a Debt Settlement Company!

Luckily, I had a family member who was able to educate me on some of the less-known facts about Debt Settlement Companies; the things they of course don’t include in their advertisements! Facts like how much more you’ll end up paying in the end. Information about the fact that none of your creditors start getting paid until they’ve gotten to put their fare share in their pockets. As I looked more into the truth about some of the fine print of these Debt Settlement companies, I remember feeling very relieved that I came across that information before signing the dotted line.

What You Need To Know About Debt Settlement Companies

Here’s some of the information that you’d probably like to know before you enter into an agreement with one of these companies:

First things first: If you are currently making on-time payments to your creditors, DO NOT, under ANY circumstances, NO MATTER WHAT, hire a Debt Settlement Company. I typically try to steer-clear of telling readers what to do. We all have our own individual circumstances and our own roads to financial freedom. What one person thinks is the worst option available may be the only process that works for another. But, with this specific instance, let me repeat myself: if you are currently making payments to your creditors, DON’T work with a Debt Settlement Company.

Here’s why: Working with one of these companies kills your credit. Destroys it. If you are current or somewhat current on your payments then your credit isn’t completely thrashed right now, and no matter how long it is from now that you find yourself debt free, you will be so thrilled that you kept it at least somewhat in tact. Believe me, as someone who wasn’t able to keep my credit score “up-to-par” (or even close), I wish that I had tried a bit harder to salvage my credit while there was still something to salvage.

Your credit affects a lot more than just your ability to get another credit card: things like renting an apartment, getting good rates on insurance, even getting a job! So, if your credit is looking at all decent right now, go a different way than the Debt Settlement Company, even if you think it will cost you more or take you longer (which it most likely won’t anyway). A good program that many people have found success with is Dave Ramsey’s “Debt Snowball Plan.”

Okay, for those of you who are not current on your bills, let’s move on.

This was the situation I was in when I was considering hiring a Debt Settlement Company. I was getting constant phone calls from creditors, knocks on my door from people serving me papers from my creditors, I even had a couple garnishments. So you can see why I was hoping that one of these Debt Settlement Companies could act as my cure-all pill and make it go away. Here are the truths that I learned that changed my mind about hiring a Debt Settlement Company:

1. Expensive For Something You Can Do Yourself

They charge you a whole lot of money, to do something that you can do for yourself! You can read more about settling debts on your own here. There are a few ways that Debt Settlement Companies dip in your pockets to fill theirs:

1. Upfront fees: Debt Settlement Companies charge you anywhere from a couple hundred to a couple thousand dollars up front. You might not be completely aware of that, because you don’t have to immediately come up with that money to be able to sign up (they’re not stupid, they understand that their potential customers don’t have that type of money lying around). They just take your first 1-4 payments and use them to pay your upfront fees. So no money is even being accrued to be used towards debt until about week 5. Now, let me state that the Federal Trade Commission has recently issued a rule to try to prevent this. According to their website, “Starting on October 27, 2010, for-profit companies that sell debt relief services over the telephone may no longer charge a fee before they settle or reduce a customer’s credit card or other unsecured debt.” To read more about this “Advance Fee Ban,” check out their website.  So hopefully that’ll help protect you from that happening.
2. Monthly Fees: Many Debt Settlement Companies charge you a flat monthly fee for their services. Now that includes months where they aren’t actually doing anything on your account. That includes months when you are making payments to them that is going directly into an account to add up (they have to let your money add up to a large sum before they can call a company to try to arrange a settlement). You are still charged their monthly “administrative fee,” even if they aren’t making a single call on your behalf.
3. Debt Percentages: Some companies charge a percentage, typically 15% to 18%, of your total debt. The more you owe, the more you pay. Do that math on your total debt. Now think about taking that money and using it to pay off your debts, not to pay an additional company.
4. Savings Percentages: Other Debt Settlement Companies charge you a certain percentage, typically in the ballpark of 25%, of whatever your debt savings are with them. Now to me, this seems like the most reasonable option. But just remember that you could probably save yourself that same amount, and not have to pay someone else a percentage of those savings! And many of these companies will still typically charge you other fees like the sign-up and/or monthly fees on top of this percentage so make sure to watch out for that.
5. This Includes “Nonprofit” Companies! You will come across many Debt Settlement Companies in “Nonprofit Organization’s” clothes. What they don’t always readily tell you (“well it’s in the fine print!”) is that when you look closer you will find these same fees, just called something different. When working with one of these “nonprofits,” instead of being called “set-up fees” or “monthly fees” you will see them as “voluntary contributions.” So just beware of that when working with a “nonprofit” company to ensure they really aren’t digging in your account just as much as anyone else.

2. They don’t start paying off your debts right away.

When I was thinking about hiring a Debt Settlement Company, I was under the (ignorant) assumption that this would be just like if I had gotten any other loan to pay off my debts: I would get the loan, that money would be used to pay off my debts immediately, and then I would pay off my loan with my new monthly payments. That is not how it works. Understand this about Debt Settlement Companies:

1. They are a business. Plain and simple. They are NOT some caring, loving company that just wants to help. They, just like most businesses in the world, are in business to make money. Neither are they stupid. They know that their customers are “high-risk borrowers.” They, just like any other company you’d go to right now, are not willing to just flat out lend you money, because they are not willing to risk that you won’t pay them back. Here’s how it actually works:
   1. You sign up with them, tell them about all of your debt, and they figure out a “repayment plan” for you.
   2. You start making the agreed upon monthly payments.
   3. They take whatever fees they’re going to take, and then put the remaining money in a side account.
   4. When the money in the account has accrued to be enough to settle a debt with, THEN they will call one of your creditors to arrange that settlement. No debts get paid off until there is enough money in that account to make a settlement payment. No amount of that monthly payment goes towards monthly payments to your creditors.

3. It doesn’t stop the calls

Working with a Debt Settlement Company does not protect you from phone calls or any other actions that your creditors can take against you. Many people get confused by this.

Debt Settlement Companies are not like Credit Counseling Services, where they start working with your creditors immediately.

Debt Settlement Companies don’t actually start contacting your creditors until they have money built up in your debt account to attempt to settle a debt. This means that you will continue to accrue any fees or charges that your creditors are charging you. You don’t have any protection against hostile phone calls, lawsuits, garnishments, etc when you’re working with a Debt Settlement Company. This is still true when you’re working with a company that is run by lawyers, & if you give them “power of attorney” to act on your behalf.

4. You are paying them to do something that you can do yourself!

Understand this: when you are far behind on your payments, creditors are usually willing to settle with you on your debts for quite a bit less than you owe. There aren’t any specific tactics that Debt Settlement Companies use, or special relationships that they have with the creditors. They just know something that you now also know:

Creditors understand that anyone that has fallen as behind as you have is a very high risk for bankruptcy.

The Debt Settlement Companies know that if they call up a creditor and say, “Hey, I know they owe you X amount, but would you be willing to accept smaller Y amount today if I send it all at once?” that, after some whining and negotiation, the creditor will say, “Yes please!”

Your creditors would much rather negotiate with you to accept a smaller (many times much, much smaller) amount than you owe them, than have you file bankruptcy and them risk getting nothing.

They know that something is better than nothing, and these “somethings” that they’re able to get from debtors instead of them filing bankruptcy add up to a whole lot for them. So that large chunk of change that you’d be paying to a Debt Settlement Company would be much better spent going to the creditors! (Again, for everything you need to know on settling your debts with your creditors yourself, read this article)

5. What about the “smaller monthly payments” & “smaller interest rates?”

Of course they can charge you lower monthly payments, because they’re not making any monthly payments to your creditors! Again remember, they aren’t paying your monthly fees. Creditors will only negotiate a settlement with people that are several months behind on their payments. The Debt Settlement Company is taking your monthly fee and putting it into a side account to settle a debt with. So, since your monthly payments aren’t being made, you will continue to accrue any charges and fees that your creditor has been charging you. The Debt Settlement Company’s “smaller interest rates” don’t make your current interest rates go away. Whatever fees and charges you are currently being charged by your creditors will continue to be charged until they agree upon a settlement and receive their money. This new “lower” interest rate is ON TOP OF whatever interest rates your creditors are charging you.

Last Thoughts:

There’s a good chance if you have attempted to Google Search about Debt Settlement services that you have read the piles of fluff that exist on the topic. I hope that this has helped educate you on how Debt Settlement services really work and better help you make the right decision for you and/or your family.