Should I Try Debt Settlement? |
By Kenneth Long on February 23, 2010
.jpg.aspx?width=75&height=75) There is a reason why the Federal Trade Commission has been examining debt settlement companies. They routinely use false advertising to promote their schemes.
To be clear, debt settlement companies have nothing to do with legitimate credit counseling organizations that also provide debt management programs. These are two distinctly different types of entities, and their results are dramatically different.
Debt settlement companies claim that you can settle your debts for less than half what you owe. The problem is that by the time you accumulate enough money to settle for half, the debt has increased by 50%. That $6,000 credit card balance is now $9,000, so you might be able to settle it for $4,500.
Now $4,500 is certainly less than $6,000, which does sound appealing. But wait, there's more!
The Internal Revenue Service counts that $4,500 write off as forgiven debt. In other words, they want you to pay taxes on it just like it was income. You'll find this out when you receive Form 1099-C.
The other catch is that you already paid the debt settlement company well over $1,500 in fees. $1,500 is the minimum upfront fee that we have found among the leading debt settlement companies. In addition, you may have to pay another 25% of the savings.
The point is that after you complete your debt settlement program (assuming you are among the 7-11% that are successful), you have barely saved anything at all. And your credit? Well it is supremely trashed.
You must also keep in mind that using a debt settlement company to resolve multiple debts means that your smaller debts will be focused on for settlements first. That means that after you have paid monthly payments for 6-8 months you are able to begin saving for your first settlement. Yes, that initial 6-8 months of payments are kept by your debt settlement company as the upfront fee.
Now payments 9-15 or so can go toward settling your smallest debt. Keep in mind that the extra payments are necessary because they are taking an additional $50 a month as a "maintenance fee." Imaging a bank charging $50 a month as a service fee. The only ridiculous part about this is that people are willing to pay it!
In the end, you will likely face legal action on your larger debts even after paying thousands of dollars into this debt settlement plan. To protect yourself, you may have to speak to an attorney to gain protection fro your creditors (bankruptcy). Don't forget that you will also have to come up with the money for attorneys fees, which may take longer than your creditors take to file for a judgment!
If you are researching debt settlement companies. Consider the pros and cons of such companies. Ask yourself these questions:
- Why are almost all major debt settlement companies rated "F" by the Better Business Bureau?
- Why are all of the positive comments about debt settlement made by debt settlement companies or their agents?
- Why are all government regulators that speak on debt settlement warn against using these companies?
It's true that you want someone to help you in your time of need. However, a debt settlement company is a life ring that does not float. It will drag you down and you will drown if you don't find a true source of relief.
A debt management program may be one option, but it will only help you if you have not waited too late to get help. Otherwise, your financial counselor may recommend that you speak with an attorney.
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