Things Debt Settlement Companies Hide from You

Working with shoddy debt settlement companies can risk you from getting sued by your creditors and your wages being garnished. Don't fall for glib talks. Do thorough investigation before signing any documents. This article will educate you on the process of debt settlement and enable you to make more informed decision.

If you are constantly stressed over the thought of making monthly payments, debt consolidation may be an ideal solution for you. Not only can you repay your loans faster but also save quite a bit every month. However, you must do research before using a debt consolidation/settlement company. There are unforeseen pitfalls and swindlers out there just waiting to exploit you.

Many people don't realize the difference between debt consolidation and debt settlement or negotiation. They are not the same.

Debt settlement companies may charge hundreds of dollars initially as a setup fee to set up your account and also some monthly service charge. The amount will vary depending on your debts and the company.

These companies take monthly payments from you but do not pay them to your creditors. What they do instead is they keep aside this money in a trust account, negotiate your debts with your creditors and when there is sufficient amount, pay them in full to your creditors. However, it can take years depending on the amount you owe to your creditors and you also risk the possibility of being prosecuted by your creditors and also wages might be garnished.

These companies also don't ask your creditors to stop interest, late payment fees, over limit fees from mounting. So while you are still negotiating, the bills will continue to grow and in the case of litigation, you might owe lot more than what you used to before, if you lose the case.

There are also many companies that don't disclose all of these upfront. Unless you sign up the papers, they won't reveal how their service works. Only if you ask them pertinent questions, then they'll reveal to you.

To illustrate how debt settlement works, let me show you a hypothetical example:

Say you have piled up around $20000 in unsecured credit card debt. You owe $4000, $6000 and $10000 to three companies respectively. You negotiate with a settlement company for a monthly payment of $250 for 5 year term. You are happy with the fact that your total outflow in 5 years would be $250 x 60 = $15000, thereby saving you $5000.

The admin fee will cost you $750 and your first three months payment will go towards reimbursing that and not your trust account. Also, the settlement company will keep $50 of the monthly payment as service fee. Which means only $200 will be added to your trust account every month.

Majority of settlement companies profess to negotiate your debt to around 50% of what you actually owe. So taking your $4000 debt to one company as an example, the creditor will accept $2000 as the amount in full. So it'll take you around 10 months @ $200 per month to repay that one credit card.

However, remember that your first three months payments actually go towards admin fee and hence your first credit card settlement is 14 months after you have made the first installment.

Everything looks fine, isn't it? No. The problem now is that your creditor won't agree to accept half of the debt amount in full until it can be paid in full. Otherwise, you are expected to make your usual monthly payments.

As you don't have the required amount in full in your trust account, and you won't until more than a year after you stopped paying your creditor directly, they'll probably sue you and request that your wages be garnished before the $2000 gets accumulated in your account.

The other 2 companies will have to wait even longer to get their money from your settlement company. The $6000 payment will take 15 months more, hoping your creditors will wait that long and accepts your 50%. You can calculate yourself the time required for the $10000 debt you owe to the last company.

Even if you had signed up for a three year plan and you would have paid your debts sooner, will your creditors wait that long? In most cases no.

The truth is that you can bargain directly with your creditors itself. Many will agree to take a lower monthly payment from you and stop all interests and charges from accumulating. Doing so, you'll save thousands of dollars in admin and service fees which you would have paid to your settlement company.

Research the company you are going to deal with thoroughly before signing any documents. Many settlement companies use the words "non-profit" to make them look credulous but do not fall for it.

Taking the example above, if you pay them $15000 over a period of 5 years and they claim to negotiate your debt to 50%, they would be pocketing $5000. That certainly is profit. Why else would they help you in first case at all?

Majority of debt settlement companies will permit you to cancel your account and get a refund of amount you have paid to them till date. However, you'll have to forfeit the admin and service fees. If you feel you have been conned do not falter to argue indefinitely. You can also file a complaint to BBB or better still hire a lawyer if you feel incapable.

Better Business Bureau's website (http:/www.bbb.org) lists reports on hundreds of companies. Here are some of the companies who are in poor light:

American Debt Relief - Los Angeles, CA (A.K.A. A M Debt, American Debts Relief, Debt Relief)

Financial Rescue Services - Burbank, CA

National Consumer Debt Council LLC - Irvine, CA (A.K.A. NCDC, United Consumer Law Group)

Debt Legal Services - Anaheim, CA

Make sure you do thorough research regarding a company before signing up any documents and making long term commitments. If you find them dilly-dallying and not delivering satisfactory answers to your questions, skip to the next one. There are many trustworthy companies out there. You just need to keep searching and make necessary inquiries.

About the Author:

Denise Hall is the owner of Home Business on a Budget which specializes in tools and resources for your home business needs. Subscribe to Home Business on a Budget Newsletter for weekly articles, tips, information and resources. To Subscribe mailto:hbb_newsletter@a1ebiz.com

Like this site? Please link to us.