Debt Settlement Companies - Top 5 ways they can Screw you!

    Debt Settlement Companies are the solution to all of your debt problems.  No matter how much you are struggling or what the circumstances are, they will step in and resolve all of your problems.  Just turn everything over to them and rest easy knowing your financial future is secure.

    Sounds a little far fetched don't you think?  Well if you have ever seen, heard, or read any of their advertisements, this is the impression they are giving consumers. Lets take a "time out" from the B.S. that most of these guys are peddling and look at the Top 5 ways that the typical debt settlement company can do more damage than good if you are not careful.  

5.  Their Free Consultation is just a Sales Pitch for Debt Settlement. 

    When you are struggling with too much debt, the first thing you need, more than anything else is honest, impartial advice about the best strategy for digging yourself out of your financial hole. Some of the strategies you need to look into in addition to Debt Settlement include a debt snowball, Consumer Credit Counseling,  Bankruptcy, and surprisingly perhaps doing nothing at all.

    Unfortunately when you call a debt settlement salesman for a consultation, with very few exceptions, you will simply be given a sales pitch about their debt settlement program.  Just like you would probably not ask a car dealer if it is a good time to buy a new car, you probably wouldn't want to ask a debt settlement salesman if signing up into his program is the best financial move for you.  I am going to go out on a limb and say that the answer will almost always be yes.  

4.  They can increase the likelihood of you getting sued. 

     Most Debt Settlement Companies focus on sales, not on service.  As such, their business model is designed to bring in the maximum amount of clients.  This model typically results in having to create a system where every client gets the same cookie cutter service.  Their "consultants" (I hesitate to even call most of these people consultants), have to take shortcuts wherever they can to keep up with the demand.  One way they typically do this is by sending a "cease communication letter" to all of their clients creditors.  

    As you can imagine, creditors are not very thrilled to have a debt settlement company throw up a wall between them and their right to collect on debts.  In recent years, many creditors that receive these types of letters will simply fast track those accounts to their litigation department and dramatically increase the likelihood of a lawsuit on that account.   Knowing this, many debt settlement companies still continue to send these letters to creditors because their volume of clients prevents them from providing the individualized, personal attention that is required for the best possible outcome for each client.  Rather then scale back on sales and do what is right for existing clients, they simply continue this dangerous, outdated "one size fits all" practice because fixing the problem would cut into their bottom lines.

3.  They encourage clients to stretch out the Debt Settlement Plan for 4 or 5 years.

    Since they are focused solely on sales and not on the success of their clients, consumers are routinely put into programs with very slim chances of success.  Instead of telling consumers the reality of their situations, they try to sucker them into their program with promises of low monthly payments.  Who doesn't want a lower debt payment?  What they don't tell you is that lowering the payment will have the adverse affect of making your creditors wait longer to get paid and dramatically increase the likelihood that you will be sued.  Not to mention if you are already struggling financially, a 5 year plan has a much lower chance at success than say a 2 year plan.

    The cold hard truth is that if it takes you 4 or 5 years to save up enough money to settle your debt, YOU SHOULD NOT BE IN A DEBT SETTLEMENT PROGRAM.  Now, are there rare exceptions to this rule?  Yes, there are rare exceptions but most of these companies are putting consumers into these programs as the rule, not the exception.  They do this simply so they can impress you with some low monthly payment.  Don't be fooled by this sales tactic. Debt settlement is not about a low monthly payment, it is about saving up as much money as you can as quickly as you can so you can pay your creditors back, avoid bankruptcy and move on to better financial success.

2.  They have High Fees that are usually not tied to their performance.   

    Most debt settlement companies charge about 15% of your total debt.  They typically have absolutely no financial incentive to go to bat for you, and do everything they can do get you the best deal possible.  They make the same amount of money whether they settle your debt for 70 cents on the dollar or 30 cents on the dollar.  Their sales pitches sound great. They routinely will tell you that they will save you 60 to 70 percent of your debt.  If they are so confident in this outcome then why are most of them unwilling to charge a fee based on the amount of money that they actually save you?  Any company that is unwilling to tie their fees to their performance is highly suspect in my book.  After all, if they are not willing to put their money where their "telemarketers" mouths are, then can you really believe what they are selling you?

1.  They typically collect most or all of their fee before they settle your debts.

    Would you hire a contractor to remodel your kitchen if they insisted on most or all of the money before they even got started?  Of course not, but for some reason most debt settlement companies expect you to be ok with this.  Sure, during the sales process, they do their best to gloss over this fact by wrapping the fees into the monthly payments.  But by in large not only are these companies charging huge fees but they will want to collect that entire fee within the first 12 to 18 months of the program.  Well if they are pitching you on some idiotic 4 year plan, that means that for the last 2 1/2 years of the program you represent absolutely no future revenue to the company and are now just a liability to them.  From a business standpoint you are an ongoing expense with no further revenue producing potential.  

    As a consumer you do not want to be in a position where you have paid all of your fees but have not yet received much of the service you have paid for.  What happens if the settlement company goes out of business?  There are an awful lot of debt settlement programs going out of business these days.  I believe at least 60 to 70 percent of debt settlement companies in business today will be out of business in the next 2 years.  Largely because of the recent moves by regulators in many states to clamp down on these companies that are just outright ripping people off.  So if you sign up into a 4 year plan, spend the first 18 months paying fees and then find that the company goes out of business you are certainly up the proverbial creek without a paddle.  You will still owe most if not all of your debt  and be much worse off then you were when you contacted that company for help.

    The lesson here is that, in my personal opinion, I believe that most debt settlement companies are in it for themselves, not their clients. They put sales above service and profits above client success.  Before you even consider working with a debt settlement company, you need to determine if the financial concept of Debt Settlement is the best way for you to alleviate your debt burden.  If you find that it is, then please take your time, do your homework and thoroughly vet the practices of any settlement company you are thinking about hiring to assist you.  The last thing you want to do is spend thousands of dollars in fees, only to be left much worse off financially a few years down the road.
      

Related posts:

1. Top 5 Reasons Most Debt Settlement Companies Fail their Clients.
2. Why are There 1000's of Debt Settlement Companies All of the Sudden?
3. Top 5 myths told by Debt Settlement Companies
4. TASC - The Association of Settlement Companies - A Closer Look
5. The Association of Settlement Companies - TASC - An Introduction