Debt Settlement Companies are everywhere. You have seen the ads on TV and heard them on the radio. You know, the ones where they promise to cut your debts by up to 70%, stop the creditor phone calls, lower your monthly payments, and make your life so blissfully happy that you will wonder how you could have ever lived without them.
In reality, I would rate most Debt Settlement Companies as “Epic Failures.” What follows is by no means an exhaustive list of the things you should look for, but if a company fits this profile, you should seriously think twice about entrusting your family’s financial future to them.
Top 5 Reasons Most Debt Settlement Companies Fail their clients.
5. They attempt to cut off all communication between you and your creditors.
Putting up a wall between you and your creditors may sound like a nice respite for you, but it is an absolutely terrible negotiation strategy. You need to keep the line of communication open with your creditors. If you have a legitimate financial hardship and you are hoping to work out an eventual settlement with your creditors, you need to have that communicated to them. After all, you do owe them the money and you should at least extend the courtesy of keeping them in the loop on your financial situation and your plans on satisfying the debt.
Any debt settlement company that is going to send the creditor a “cease all communication” letter on your behalf is setting you up for disaster. The creditor will not be excited to learn that they are no longer allowed to contact you about the debt and the letter could very well trigger an early out referral to their legal department for a potential lawsuit. Sending these letters is a dangerous and outdated practice and any settlement company that still uses this approach definitely is not looking out for your best interests.
4. They have too many clients to provide the proper attention to your situation.
This is not Costco or Sam’s Club. You will not get better deals and certainly not better service if the company is dealing with thousands of other clients at the same time. Every consumer has a unique set of circumstances that ensued prior to them arriving at the point where they were unable to pay their bills. If a company is “servicing” tens of thousands of other clients at the same time, how are they going to provide your situation with the individual attention needed to produce the best results for you?
The reality is, companies that take on too many clients have to resort to a canned, one size fits all approach in order to handle the volume. If you were sending your child to school, would you choose the school that had a 200 to 1 student to teacher ratio, or the school that had a ratio of 1 teacher per every 15 students? Never entrust your financial future to a one size fits all approach. Every situation requires a unique perspective, understanding and solution.
3. They are focused on Sales not Service.
Almost all Debt Settlement Companies are sales driven. It is not about helping the consumer, it is about signing up the consumer into their program. In most cases, when you call for a free consultation, you are just talking to a salesman, not a financial consultant. Ask for the credentials and the background of the specific individual that you are speaking with. After all, this person is giving you advice that is going to affect your finances for years to come, shouldn’t they actually know something about finance?
Do not call a Debt Settlement Company for financial advice. You need to speak with a qualified financial professional first to help you determine the best strategy for you to pursue, given your circumstances and goals. You should never call a Settlement Company unless you know Debt Settlement is the best approach for you and you are now researching the specifics of individual programs that are available.
2. They hold on to your money every month.
When working with a debt settlement company you should find one that allows you to hold on to your own money, or at minimum use a FDIC insured 3rd party escrow account. I personally believe it is better to hold your money in your own bank account. Life happens every day and you never know when an emergency may require you to have access to the money you were setting aside for settlement. If you are saving your own money, you are in control over what you are saving and how fast you are saving it. Most companies want to control your money because they want to take their excessive fees from you as quickly as possible.
1. They charge excessive fees that are not tied to their performance.
The purpose of hiring a debt settlement company is to assist you in negotiating down your debts with your creditors as quickly as possible. Unfortunately most companies charge outrageous fees in the neighborhood of 15% of your entire debt and usually want to collect that money within the first 12 to 14 months of the program. This means they collect all of their fees before you are able to settle your debts. This business model directly contradicts their supposed objective of helping you get out of debt as quickly as possible.
What they don’t tell you is that most of that 15% of your debt fee goes to marketing, not to the service they are providing you. As a general rule, never hire a company that does not base their fee on their performance. You would never pay a contractor the entire bill upfront, why would you pay a Debt Settlement Company any differently. Find a company that charges a fee based on what they actually save you and will charge a majority of their fee after they perform the service.
For these reasons and a few others, I rate most of the debt settlement companies in existence as “Epic Failures” when it comes to client success rate, customer service and reasonable fee structures. There are a small handful of companies that do not fit this mold, but they are difficult for consumers to find because they do not spend large amounts of money on advertising. Entering into an agreement with a debt settlement company requires a major leap of faith on your part and it is not a decision that should be made lightly. Here are a few programs that I would consider to be among the best debt settlement companies.
If the debt settlement company that you have chosen fails to keep their promise, I think you have the right to sue them. And you still have the last option to avoid a lawsuit against you by filling for bankruptcy.
Hello Graham,
You certainly have the right to sue them, but that is the last thing consumers are going to want to deal with while they still are trying to clean out their past due debts and possibly fending off their own lawsuits.
So it is better to keep your guard up and hopefully prevent yourself from getting in a position where you would have to try and sue to get your money back.
An ounce of prevention is worth a pound of cure.
Damon,
I have been looking for a way to consolidate my debt and while looking online, stumbled upon your article. Have you heard anything about Consumer Credit Counseling Service? I have heard good things about them from others, but am not sure if I should try them or not.
I wasn’t sure about the suggestion of keeping lines of communication open with your creditors, though. Have you ever actually tried to talk to those people? They don’t care.
Harry
Hello Harry,
Yes, consumer credit counseling is a good solution if you are in a situation where you can afford your payments but simply have really high interest rates and you would like to have your rates lowered so you can pay more principle toward your debt.
Actually dealing with your creditors is not that difficult if you know the rules and know what the outcome is going to be before you start.
I don’t see any reason to hire debt settlement company. Isn’t it better instead of paying fees to them to pay towards your debt?
Hello Mercedes,
There are plenty of reasons to hire a settlement company, just as there are plenty of reasons not to hire one. It really comes down to a personal preference of the individual.
A consumer can absolutely negotiate and settle their debts with their creditors. A good debt settlement company can certainly provide some advantages though, and it is up to the individual to weigh the costs vs the benefits.
Personally, I’m not crazy about debt settlement companies unless it’s your last resort. I think you’re much better off to deal with the creditors directly, as stressful as that might be. Like you mentioned, having a third party running interference can ease the stress, but in the long run it can cause a lot more.
The cost of many of these services alone is enough to make me doubt them. Wouldn’t that money be better served to pay down some of the debt?