Think Twice Before Paying For Debt Settlement

There’s a few more ads for debt settlement firms on TV these days. You know: the companies that promise that they can settle your debts for far less than you owe — even for “pennies on the dollar.” Most of those companies can’t follow through on their promises, though, and some are outright scams.

Most debt settlement companies work pretty much the same way. When you sign up with one of these firms, you stop making payments on your debts and instead send one monthly payment to the company. The company then divides the money between your debts, after convincing the companies holding those debts to accept a small total than you had previously owed. While non-profit debt settlement organizations can provide useful services, most debt settlement companies are in business for themselves: on top of that one monthly payment you may find yourself paying all sorts of fees and you may not be making a dent in your debt. In some instances, the debt settlement company may not come to an agreement with the holders of your debt and you can get hit with interest and late fees from your creditors while you wait for your debt settlement company to find a solution.

More people are turning to debt settlement companies this year than in years past, and that fact is made clear by the number of complaints about such companies. According to the Wall Street Journal, complaints about debt settlement companies this year is already double the number received in all of 2007. Part of the problem is that there are minimal licensing requirements: anyone who wants to set up a debt-settlement company pretty much can. And, as someone using those services, you have no real knowledge of their business practices or successes. The best you can do is check with the local Better Business Bureau and see if another customer has filed a complaint.

Some creditors won’t even deal with debt settlement companies. American Express, for instance, has a policy of working only with account holders. According to Lisa Gonzalez, a spokeswoman for American Express, “There’s no service or benefit that a debt-settlement company can offer our card members that they don’t receive from working with us directly.”

But there options beyond debt settlement companies if you feel that you can’t handle your debt without help. There are a number of credit-counseling services that work on a non-profit basis. While these organizations won’t get you amazingly reduced settlements, they will help develop a manageable repayment plan — and many creditors will agree to waive fees or lower interest charges for account holders working with reputable groups. You do need to be on the lookout for organizations that claim to be non-profits but actually operate like for-profit companies. Both are allowed to charge fees, for instance, but for-profits generally have more routine fees. A good indicator of a true non-profit is whether the organization offers to educate you on how to handle your credit in the future. For-profits generally ignore this facet of credit counseling.