Shocking Facts - What Debt Settlement Companies Don't Tell You
by Denise Hall
If you're thinking about using a debt consolidation or debt settlement service to
help you get out of debt faster and save money on your monthly payments, make
sure you do your homework before choosing a company. There are definitely
shams and scams out there.
First let me say that debt consolidation is *not* the same as debt settlement/
negotiation, which most people don't realize.
Debt settlement companies charge hundreds of dollars as an initial "admin fee"
to set up your account, plus a monthly service fee. The fees vary depending on
the company and the amount of your debts.
Such companies take your money every month, but don't make monthly pay-
ments to your creditors! Instead, they put it in a trust account, negotiate your
debts with your creditors, then make a lump-sum payment when there's enough
in your account to pay a creditor in full.
That can take *years* depending on the amount of debt you have with each
creditor. Meanwhile, you can be sued by your creditors and your wages can be
garnished! (Or just don't make payments to your creditors. You'll end up in the
same spot without paying someone to help you get there!)
Settlement companies don't ask your creditors to stop all interest, late fees and
overlimit fees from accruing. That means while the negotiations are ongoing,
your bills will continue to grow! So if you're sued and a judgement is brought
against you, you'll owe more money than before!
And shoddy companies, which there are alot of, don't tell you *any* of this up
front. I call it "getting permission by ommission" because they simply don't tell
you how their program works *before* you sign an agreement with them. Or after,
for that matter. But if you ask the right questions, eventually you'll figure it out.
(Or when the crap hits the fan. Whichever comes first.)
Let me give you an example of how debt settlement works.
Let's say you have $20,000 in unsecured credit card debt. You owe $10,000 to
one credit card company, $6,000 to another and $4,000 to a third. You agree to
a 5 year plan where you pay $250 a month to the settlement company. (After all,
$250 a month for 60 months is only $15,000, so you're saving $5,000 and you'll
be debt-free in 5 years, right?)
The admin fee will cost you $750. Your first 3 monthly payments go towards that
and nothing gets put into your trust account until your 4th month.
The settlement company keeps $50 of your $250 payment each month for the
service fee. That means $200 a month is being added to your trust account.
Most debt settlement companies claim to be able to negotiate your debt for about
50% of what you owe. So let's use the lowest credit card debt as an example.
If you owe $4,000 and your creditor agrees to accept $2,000 as payment in full, it
will take 10 months at $200 per month to have enough in your trust account to
pay off just that one credit card.
But remember, your first 3 payments to the settlement company only paid the
admin fee. That means your first credit card settlement is 14 months *after* you
started sending them money.
So what's the problem? It's simple. Your creditor won't agree to accept half of
your actual debt unless, or until,it can be paid in full. Otherwise, you're expected
to make your normal monthly payments.
Since you don't have $2,000 in your trust account, and you won't have it until
more than a year after you stopped paying your creditor directly, they'll probably
take you to court and request that your wages be garnished long before you have
that $2,000 built up.
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