Debt Settlement Scams: What to Watch Out For

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Debt settlement companies are everywhere you turn. They advertise on television, on the radio, and in your local newspaper. They promise to solve all of your debt problems by working with your creditors to settle your balances for less than you actually owe. Unfortunately, consumers often pay debt settlement companies for their services only to discover too late that they have fallen victim to a scam. Don’t let this happen to you. Knowing what to watch out for when investigating debt settlement services can prevent you from losing money and falling even further into debt.

High Costs, Low Results

Debt settlement companies don’t work for free, and negotiating consumer debts often comes with a hefty price tag. Because debt negotiation services are often priced according to how much you owe your creditors, paying for debt settlement can end up costing you thousands. If the prices don’t deter you, however, the results might.

Debt settlement doesn’t come with a guarantee. Some creditors are more willing than others to negotiate the amount of their clients’ debts, but no company is legally required to do so. If you have a steady job, your creditor may reap a much higher benefit from taking you to court for your outstanding debts and garnishing your wages. Working with a debt settlement firm to settle your debts simply would not be in the best financial interest of the company. Debt settlement firms know this, and often require consumers to sign a contract. Until your term with the debt settlement company expires, you will still be required to submit your monthly fee regardless of whether or not your original creditor agrees to lower your balances or files a lawsuit against you.

Credit Damage

A common tactic employed by debt settlement companies is to instruct consumers to make their monthly payments to the company rather than to their creditors. The debt settlement company then places the payments into a fund. The intention is to allow the payments to accrue until enough money is present in the consumer’s account to negotiate a lump sum settlement with the creditor.

In the meantime, the creditor isn’t getting paid. This is to the advantage of the debt settlement company since a creditor who stops receiving payments is often more willing to negotiate. Each missed payment, however, appears on the debtor’s credit report. The Fair Isaac Corporation, which is responsible for calculating consumers’ FICO scores, places a greater importance on payment history than any other aspect of an individual’s credit history. Because of this, even a few missed payments can cause significant credit damage.

If the creditor opts to file a lawsuit rather than negotiate a settlement, the subsequent judgment will damage your credit score even further and will remain for seven years. In addition, the debt settlement company isn’t liable for any damages you incur as a result of the lawsuit. Nor will it provide you with help to defend yourself in court.

Illegitimate Companies

There is a fundamental difference between debt settlement and credit counseling. Unfortunately, many debt settlement companies have begun publicly marketing themselves as credit counseling agencies to avoid the negative stigma that comes with being a debt settlement firm. Unsuspecting consumers, knowing that credit counselors can help them manage their debts, then fall for the ruse.

If a debt settlement company is unlicensed, there is no guarantee that it is a legitimate business at all. The Federal Trade Commission’s report, “Knee Deep in Debt,” warns consumers to be wary of settlement firms that are unable to provide a copy of a valid license. These firms are more likely to take your payments and quietly disappear.

If you are hoping to settle your debts for less, you may be much better off negotiating with your creditors yourself. Not only is this practice free, but you will always know where you stand with your creditors and can thus avoid unpleasant surprises. Should you opt to work with a debt settlement company, take the time to check the company’s status with the Better Business Bureau and request a copy of the company’s state business license. If you are already in debt, the last thing you need is to fall victim to a scam.

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