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Debt Settlement Companies Can Cost You Big Money

Updated on June 26, 2016

Millions of people are overwhelmed with credit card debt. Debt settlement company make promises to negotiate with your bank to pay off your debt. With the current economic condition, the promises are tempting. We can't afford our monthly bills, let alone our massive credit card balances. We need to reduce our credit card debt.

But don't hire a debt settlement company to settle your credit card balances yet! First, you must verify that they are not a scam. Over the years, many of these companies have taken advantage of their customers with unfair business practices. So before you hire a company, make sure they are trustworthy. Actually, you might just be able to settle the debt yourself.

What is a Debt Settlement Company?

A debt settlement company is a business that promises to settle your debt. They charge a fee and then they deal directly with your credit card companies. They promise that they will negotiate with your banks, reduce your interest rates, and maybe even negotiate your balances down so you will only have to pay a small percentage of the money that you owe.

Most debt settlement companies promise that you will only pay pennies on the dollar. They promise that you will only pay a fraction of the money that you owe on your credit cards. But remember, there is no such thing as a free lunch. If it sounds too good to be true, then it probably is. So be careful out there! And keep reading!

How to Settle Credit Card Debt

Debt settlement companies make big promises to pay off your credit card debts.
Debt settlement companies make big promises to pay off your credit card debts. | Source

How Does Debt Settlement Work?

When you hire a debt settlement company, you are hiring them to negotiate a deal between you and the credit card company. Since they already have a working business relationship with many of the banks, you are paying them for their friendship with the bank.

The reason that you are considering hiring a debt settlement company is because you have a certain amount of credit card debt that you owe. The banks want their money, and they are probably sending collection agencies after you. The problem is that you don't have that much money, and the bank is  that you might go bankrupt. At this point, it's just a game of chicken.

The debt settlement company is paid to play chicken for you. The idea is that you pay them, and no one else. They handle all the bills from that moment forward. Then, they STOP paying all your credit cards. After about six months or a year, the credit card company now hasn't received a payment from you in months. They may be afraid that you will file bankruptcy. If you file bankruptcy, then they get nothing. So then they often decide to settle.

But here's the problem: You are paying the debt settlement company up front. You are risking a bad credit rating, an increase in a tax payment (since you have to include the money as income), and you will lose the money that you pay to the agency if they don't pay that money to the credit card. Also, if the credit card agency sues you and wins, you'll get a court judgment against you, and you'll have to pay that anyway. (Court judgments cannot be taken away in bankruptcy.)

I'll be honest with you. I think it's a bad idea. But if you're in over your head, what are you going to do?

Debt Settlement Companies Say They Will Save Money

The advertisements sounds like they are a good idea. After all, if you settle your debt, then you will be finally done with it. One you are settled, the debt is gone.

But there are several problems: Remember, you are risking a bad credit rating, an increase in tax payment (since you have to include the money as income), loss of any money you pay to the debt settlement company, and risk of being sued by your bank.

Sometimes, though, it will work out for the best. In fact, in some cases, you can settle the debt yourself. But remember, in order for the debt to really be settled, you need to have a letter that specifically states that you are paid in full forever. The letter should say "final settlement" and should be signed by the credit card company. If you do not have this letter, then you do not have a deal. Then, the credit card company will still expect you to pay the settlement amount in full.

What Are the Pros and Cons of Debt Settlement Companies?

Many people believe that hiring a company to settle their credit card debt is a great idea. But the problem is that some of these companies are scams. So before signing any contract with a company, make sure that you check them out.

  • Search the internet for the company name and the word "scam."
  • Do a search for the company on the Better Business Bureau's website.
  • Look at the company's history, and see how long they have been in business.
  • Try to find recommendations from past customers. Ask friends and family members who have been in a similar situation in the past.

So how does the scam work? The problem is that some debt settlement companies have used several different scams in the past. A few of the more brave companies have just taken the money up front and run. But most of the unscrupulous companies have signed contracts, accepted monthly payments, then withheld the payments from the credit card companies in order to gain "leverage" (by not paying the bill, they scare the company into thinking that you might file bankruptcy, but it also diminishes your credit score.) In the end, these companies have very high fees and pay very little to your credit cards.

Even if the debt settlement company is a legitimate business, it is very expensive. The fees are significant, and sometimes when the credit cards find out you are using a debt settlement company, they will try to sue you before you can settle because they want to get your money before you have the chance to go bankrupt. Remember, if you have a court judgment, it will not be able to be waived under a bankruptcy, so it is to a bank's advantage to sue you before you go bankrupt.

These companies are illegal in Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia, and Wyoming. New legislation was introduced in April 2010 by U.S. Senator Charles E. Schumer (D-NY) and Claire McCaskill (D-MO); this bill was called the Debt Settlement Consumer Protection Act of 2010 and is aimed at protecting consumers.

Save Money and Settle Your Debts Yourself

Instead of hiring a debt settlement company, save a lot of money and settle your debts yourself. It will take a strong will, but you will be able to save a lot of money. You can do the same job that a debt settlement company can do, and you can save yourself a lot of money.

When you settle your own debts, you can pay off your own creditors. Start by calling each of your creditors and tell them that you are experiencing a hardship at this time. Tell them what is going on in your life, and tell them that you really want to pay your bills, but it is just not possible at this time. But you will need to be strong. They will probably tell you that there is nothing that they can do. Be strong and tell them that there is nothing that you can do. It really is a game of chicken. Ask them what they can do to help. Eventually, they will have to work with you. If you file for bankruptcy, then they will get nothing. They want you to pay off some of the credit card debt, so they will have to accept some debt settlement. There are many books that can help you with this process.

Have you ever used a debt settlement company?

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Harrassment From Your Creditors

Regardless of how you settle your debt, if you decide to not pay your bills for six months to a year, you will eventually have the power in the relationship. Your credit card companies will be afraid that you will go bankrupt, and they will be willing to accept a settlement because anything you pay will be better than nothing. And frankly, if you go bankrupt, then they will get nothing.

However, in the meantime, you are going to be subject to a lot of harrassment. Your creditors are not going to be happy. You aren't paying them, and they are going to be mad. You will be charged late fees. You will get phone calls. You will get nasty letters. You will get collection agency letters. In fact, you might even get a letter threatening court action. It's all a matter of how far you want to take it. I'm not saying that this is the right thing to do. Personally, I wouldn't go this route. But, you have to do what you have to do. It really is a game of chicken. If you wait it out for six months to a year, you will have the power of negotiation.

But remember, your credit history will be destroyed. But frankly, if you are in this much credit card trouble, I guess it can't get much worse anyway. It's your call. Eventually, perhaps your creditors will be afraid that you will file bankruptcy, so they may decide to settle.



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