These days several companies claim that they can reduce the amount of money you owe if you avail their services. These debt settlement agencies are flourishing because of the desperate situation of many borrowers, precipitated by the poor economic conditions.
However, the entire debt settlement sector is dubious and misleading. An understanding of the working of the debt settlement companies would show you the same.
Debt settlement services are being offered by three types of companies – the nonprofit debt management counselors, for-profit debt management companies and the debt settlement companies.
You can completely trust nonprofit debt management counselors, as they are not trying to get any money out of you, though their solutions, like a payment plan, require time and patience. Nevertheless, these companies offer important advice and they will guide you in paying back the debt. The Department of Housing and Urban Development can also give useful advice if you are facing problems in paying back housing loans or other costs connected to your house.
The work of for-profit management companies is the same but they charge a commission from the payment you make. These companies might achieve the results that they claim, but paying for their services when you are anyway in financial trouble may not be such a good idea. Especially, when similar services can be availed from nonprofit companies without an extra financial burden.
The least trustworthy of all these companies are the debt settlement companies. Most of the advertisements that you come across are by these companies. They will claim to reduce your debt payments by more than fifty percent but these promises are hollow.
The methodology that is used by these companies is that they first collect monthly payments from you. They keep this money with themselves rather than passing it on to the creditors like debt management companies do. After they collect a lump sum amount, they negotiate for debt settlement by using this money as the leverage.
These companies collect a large fee. Your monthly contribution for the first few times might just go into their fee and not for settlement of your debt. Further, your payments would not be made for many months and your credit scores could be affected. You also run the risk of legal action from the lenders for not paying the debt.
Be wary of these debt settlement companies and think twice before you use their service.