I woke up this morning, poured the last of a pot of coffee into my cup (my wife usually drinks most of the pot before I get out of bed) and sat down with the modern day newspaper, my google reader. I came across a story in the New York times about debt settlement. I am a little amazed about how many articles I have seen lately on the topic.
Debt Settlement has always been sort of a Pariah to the main stream media. Something people talked about in hushed tones behind closed doors or in dark alleys. Certainly creditors don’t want to talk about it for obvious reasons. It has been around as a financial concept probably since the humans began to trade with each other. There is nothing complicated or special about the concept itself. A debtor owes a certain amount of money to a creditor. For whatever reason, the debtor is unable to pay the creditor. The creditor agrees to take a lessor amount and call it even because something is better than nothing. Sounds simple and logical for both parties involved.
Why the Pariah status you ask? Well enter a third party into the middle of this two party problem. The dreaded debt settlement company. Now on the surface, the concept of a debt settlement company actually doesn’t sound too bad. Here you can have a disinterested 3rd party to clearly and rationally negotiate an agreement between the debtor and creditor. That sounds all well and good but the problem actually stems from the business model of most of these debt settlement companies. They typically charge huge fees (usually all upfront) and focus more on collecting those fees than they do on helping either of the original two parties.
So now the debtor is unhappy because he has been making payments for many months and nothing has been negotiated with his creditors. The creditor is certainly unhappy because any money that the debtor had has been going to the debt settlement company. The only one winning is the debt settlement company. Sort of like paying for an attorney and losing your case. He didn’t guarantee results and if he didn’t take your case on contingency (only paying him if you win), you are simply out the money. Paying a debt settlement company their fee upfront is no different and only guarantees results for them, not you and certainly not your creditor.
Debt settlement companies for the most part really started in the early to mid 90’s. However it hasn’t been until the last few years of this financial crises that it seems like they are everywhere now. Many of these debt settlement companies are just like “the King” and “the Duke” from Mark Twain’s “Adventures of Huckleberry Finn” (modern day confidence men looking to prey on the weak and gullible.)
Quite a number of these firms that heavily advertise on the radio and television are simply marketing organizations looking to make big money from cash strapped consumers. Pumping worthless stocks in the 90’s, pushing bad loans in the housing boom and now selling the magic elixir for consumer debt. It is the combination of the financial crises and the heavy advertising that has regulators on their toes and crying fowl at the debt settlement industry.
The financial concept of settling your debts is a viable strategy in many cases and people have been successfully negotiating their debts for thousands of years. Think twice and do some major research before handing over your financial future to a Debt Settlement company that spends a heavy amount of money on radio and television advertising. After all those costs have to get passed on to someone right? Out of the thousands of settlement companies out there, I can count on one hand the companies that I have seen that I would even consider referring to a consumer. As a general rule of thumb: if they charge all of their fees upfront, tell them to pass the hat to someone else and move on.