Can You Trust Debt Settlement Companies?

You will find many tempting offers by companies claiming that they can settle your huge debt for a small amount. Many people may be lured by these promises, but in reality, these promises are hollow and there is no way of getting away by paying a small part of your debt.

You could still be attracted by these promises as you may feel that they cannot be completely baseless. The companies that make these tall claims are themselves unsure about the results and will charge you a lump sum fee instead of a commission based on the amount of settlement.

These companies are debt settlement companies. They exploit the desperate situation of a person who is facing the burden of too much debt and who will clutch at every last straw. They rely on the principal that creditors would rather get some money back than none.

What They Claim

Debt settlement programs take monthly deposits from customers. They keep depositing the money in a bank or a trust until the total amount is a substantial proportion of the total debt that is owed. After that, they negotiate with the lender and offer that amount for complete settlement of the debt. According to them, this will substantially reduce the total amount that you’ll have to pay.

Why it Doesn’t Usually Work

You may think that this does not seem like a really bad proposition. However, the lenders agree to settle the debt only at the stage when the borrower has been consistently defaulting. You will have to wait around six months for the debt settlement company to make an offer to the lender. Meanwhile, you will have to bear the pressure of the lender for debt collection. It will start with letters and calls. You will then be given legal notices and even summons. If the lender starts court proceedings, then you could be in a lot of trouble by the time you collect enough money to pay back your lender.

Moreover, there is a good chance of the lender refusing to settle. You will just end up bearing the menace of collection calls. You can lose all the fees that you gave to the debt settlement company, irrespective of the results.

Your credit score would fall because of default in payments. Further, even if you get a settlement, the part of debt that you don’t have to pay will be considered as income and taxed by the IRS.

There has already been a lot of criticism of dubious debt settlement companies and how they operate, and the Federal Trade Commission is in the process of investigating the industry.

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