What Are The Risks Of Using Debt Settlement Companies?
If you are like many people who are having financial difficulties and are trying to find a way to stay afloat, there are a few options. You can work with your banks on a debt settlement at minimum, or you can file bankruptcy and restructure your debt. In this article, I will explain the consequences of debt settlement that will affect not only your credit score but possible future ramifications.
Debt settlement is generally an agreement made by a lender to a debtor in order to pay off a certain amount of the outstanding debt. The amount can be between 20% and 75% of what is owed. However, there are certain things that a debtor must watch out when trying to decide what to do.
First of all, many people do not realize that a bank or lender would much rather a debtor work out a debt settlement agreement where they would some of their money back, rather than have the debtor file bankruptcy. If a debtor files bankruptcy, and the lender is an unsecured creditor, it is very possible that they could end up with nothing as the secured lenders are reimbursed first. However, debt settlement agreements are not easy to negotiate and many debt settlement companies know this.
These debt settlement companies “prey” on people who have gone behind on their debt payments. After the first or second missed payment, your credit score is affected and the credit reporting agencies are able to “sell” your information on advertising lists. Now, while this seems to be an unacceptable practice, it is within the writing of your credit card agreements or other credit documents that allow this.
As soon as these debt settlement companies get a hold of the “default lists” from the reporting agencies, they will start their advertising campaigns. If you have been in default, you may have wondered how the debt settlement companies got your information. Never the less, these companies will send out notifications stating how they can and will help to negotiate settlements of your debt, whether it be with a credit card company or a mortgage banker.
The problem with these debt settlement companies is that they occasionally do not fully disclose the fees and seldomly guarantee results. This is because they actually cannot guarantee that any debt will be settled. It is entirely up to the lender to accept any debt settlement agreement.
The other problem with the debt settlement companies is that they will charge enormous fees (often up front). The fees for these companies is in the area of 15% to 25% of the total debt owed. If the actual debt that is settled is not pennies on the dollar, it is quite possible that the debtor can owe almost as much as they did before.
There are also many scam debt settlement companies out there who are preying on people in their most vulnerable of time. They offer to negotiate a debt settlement agreement for a smaller flat fee. Enticed by the small amount, many of these debtors will sign up for the program, pre-pay the fee, and never hear from the company again. It is just like out of the movie “Boiler Room”.
So, in order to minimize the amount of risk, it is important for debtors to know their options and get as much information as they can. If you are considering a debt settlement company, always do a background test on them and check the FTC and Better Business Bureau to make sure they are legitimate. Debt settlement is a much better avenue than a full bankruptcy, but you need to make sure you are dealing with a reputable company.
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