Debt Settlement is a legitimate industry that helps consumer settle their debt for less than they owe. However, there are still ways for unscrupulous companies to scam you. Watch and learn how to avoid getting ripped off by debt settlement scams.
Debt Settlement? The Good the Bad & the Ugly.
You see and hear it everywhere; settle your debt for half of what you owe. What are they talking about? What has just been described is called debt settlement. Marketers are quick to point out the big plus of debt settlement, which is paying your creditors less than you actually owe them. That’s where the good news stops. Debt settlement is an ugly financial solution and should only be considered by those in dire financial hardship. Debt settlement is only appropriate if you have fallen behind or it is inevitable you are going to fall behind on your minimum payments, and you don’t have any assets to draw from to pay off these accounts. There are ethical companies and law firms that provide debt settlement as an option to resolve debt. Debt settlement is a legitimate industry; however debt settlement as a financial solution is not a good solution for most people. Debt settlement is simply settling with a creditor for less than what you owe. You see the TV commercials, hear the radio ads, and you get the emails promising you that you can be “debt free” for ½ of what you owe. Sounds great right? The truth is that debt settlement is what I call the nuclear option. This is real simple stuff people. Debt settlement is ONLY APPROPRIATE if you have fallen behind on your credit accounts (credit cards, store cards, unsecured lines of credit, and medical bills) and you cannot get caught back up on your own. You have no assets available to sell to pay the debt and the creditor will not offer a payment arrangement you can live with. I don’t mean a payment arrangement you like, you liking the arrangement is irrelevant. It’s only if it fits in your budget.
If you’re in a situation where you’ve had a loss of income, job loss, medical issues and you’ve fallen behind and you no assets to cover the debt, then and only then do you consider debt settlement as a solution.
There are great companies and law firms out there that actually do what they claim and operate with a high level of ethics. Do your homework. Don’t just call some random ad and sign up for debt settlement. Never depend on a company that you don’t know or haven’t fully vetted. A fool and his money were lucky enough to get together in the first place. DON’T BE a FOOL.
So how do you know if a debt settlement company is legit? It’s pretty easy. First know where the company is located, don’t just have a phone number and website. Second, ask questions. How long has company been in business? See if the company has any government actions or lawsuits against them. You can check a BBB report, but remember BBB while a good starting tool to check a company’s background is not the last word. The BBB is a private membership organization. They “sell” memberships and they update their records in part by whatever information a company gives them. I’m not BBB bashing; it’s a fine organization. Just don’t let the BBB be the one and only source you use to check the background of any company.
By the way, just because a company has a few complaints against them, don’t use that as a reason to not work with a company. Every company that does any kind of volume BUSINESS DIRECT WITH CONSUMERS, over time gets complaints. Remember in today’s world anybody posts anything about anybody online. So use your common sense. If the BBB shows complaints, did the company respond in a satisfactory way? The BBB will tell you that. Relying an anonymous complaint on a blog or web forum is probably the least reliable method of vetting a company. While there may be validity in the complaint it may also be fabricated. Often times a lot of anonymous complaints are for competing firms using underhanded tactics to discredit a competitor. Consider everything, ask the company how they deal with complaints, if they give what sounds like a BS answer, then move on, just use your best judgment and do your own homework. Don’t let anybody else opinion keep you from verifying the facts for yourself. A friend or families recommendation is great, but double check for your own peace of mind. Old Russian proverb “doveryai no proveryai” it means, “Trust but Verify”
NOW BACK TO THE QUESTION AT HAND, HOW TO KNOW IF A SETTLEMENT COMPANY IS LEGIT? The biggest thing to watch out for (in my opinion) is whether a company is trying to “sell” debt settlement to you. A legitimate company or Law firm will not try and sell or convince to enroll in a debt settlement plan. To the contrary, they will make sure you have looked at all other possible options first. If you have other options (example-Your 3 months behind 25K in credit card, you don’t have enough money to get caught up, but you have funds available in a Home Equity Line of Credit or you have other assets that could be easily sold, or access to savings / retirement accounts)
If you’re in that situation an ethical settlement company or law firm is going to tell you (in most cases, with few exceptions) that you need to use the assets you have to pay the debt. Why? Because you’re going to get sued by the creditor when they discover you have assets to pay the debt in full. You’re playing with fire. The legitimate debt settlement companies and law firms will not even accept you as a client if they determine you can pay the debt. A legitimate debt counselor will always tell you that every other option (prior to bankruptcy) should be exhausted before enrolling in debt settlement they should never be twisting your arm to do it.
I’m familiar with a few of the Law Firms and Companies that offer this service. I posed this “how to know if a company or law firm offering Debt Settlement is legitimate and working in the client’s best interest” question to Canty & Associates lead Attorney Bonnie L Canty. I’ve known Bonnie L Canty for over 15 years, while you all know we don’t “endorse any Company Firm on this site, I know Bonnie Canty to be an ethical attorney. Her firm offers a wide range of legal services and focuses on Family Law including Divorce, Small Claims Court Legal Help, Debt Negotiation, Student Loan Assistance, and Bankruptcy,
Hi Bonnie, thanks for taking the time today. The question is “how can a consumer know if a company or law firm offering Debt Settlement Services is legitimate and working in the best interest of the client?”
That’s a very good question. Ask if you can meet with someone at his or her office. A red flag should go up if the company or law firm cannot accommodate a face-to-face meeting in their office. Check how long the company or law firm has been in business. If a company, look up the owners and see if they have had any past problems with regulators or businesses. The Internet is a great resource. If you are vetting an attorney check the attorney’s complaint history with the state bar that they are admitted. Most states have websites where you can look up the status of an attorney. What other services does the attorney offer if any? If the attorney only provides debt settlement services are they running a call center or a law firm? If they are offering other legal services are the attorney’s and their support staff familiar with budgeting, and the pros and cons and the ins and outs of a variety of debt solutions or are they limited to settling debts? Ask to speak to an attorney. If you cannot get an attorney on the phone, that should be another red flag. At the end of the day, trust your instincts. If it sounds too good to be true it probably is.
I’ve heard that creditors are suing a lot more people who are delinquent and have past due balances than in previous years. Is this accurate, and what should the average person who falls behind and is in a legitimate financial hardship, what can than do to try and avoid being sued (other than the obvious, pay the debt)
Creditors need an open dialog. When you get married you may not like your in-laws but you take their calls and visit with them periodically to keep the peace. It is the same concept. If you completely ignore the creditor they are likely to escalate collection activity including commencement of litigation. If you periodically speak with the creditor, explain the hardship and that you are working toward a solution and need some time so that you can commit to a solution the creditor should keep the account in a follow up status and be less likely to escalate the account.
So there’s some perspective from an Attorney with substantial experience with debt negation. Thank you Bonnie Canty of Canty & Associates for taking the time to share your insight with the readers.
Let’s assume that your situation makes debt settlement a viable option to get out of debt. You need to fully understand how the process works. It’s fairly simple. Once you have decided on a company or law firm to handle your settlement, they will schedule payments typically on a monthly basis. Payments should be less that your minimum payment requirements would be for credit cards and unsecured loans by 30% or more. When you make your payments they should be held in a separate account (not the operating account of any company) or trust account or what’s called an IOLTA account (Interest on Lawyer Trust Account) Some Settlement companies have a bank account opened in your name, in case the funds accrue until there is enough money to settle on an account. Expect to pay about 60% of the balance on each account. You could end up paying much less, but expect about to pay about 60% of an account balance.
Direct Minimum payments or monthly payments to your creditors are not made with debt settlement. (The exception is if a creditor agrees to monthly payments or “structured settlement” There is no guarantee a creditor will accept a structured settlement). It takes a long time to accrue enough money to make a settlement happen. Therein lies the danger. You can get sued for non-payment. Just because you’re making payments to a settlement company, that does not provide you any protection from being sued by the creditors you owe. Make sure your dealing with an experienced debt negotiator. An experienced company or law firm can in many cases work out a payment arrangement with a creditor that is threatening to sue you.
MAKE SURE YOU STAY ON TOP OF THINGS!!!!!!! Look at your mail, if you get a threatening letter from a creditor included in settlement; notify the company you’re working right away. Once a lawsuit is filed it’s very tough to work out any kind of re-payment arrangement that you’re going to be satisfied with. There may be tax consequences for settlement as well. Speak to a tax professional or do your own research on the subject to see if tax consequences might apply to you.
Beware of Scammers!
Scammers love debt settlement because you make multiple payments to them that should be accruing to settle with your creditors. They take it all. Again there are good companies and bad. Do your homework. Know whom you are dealing with.
With every new financial scam, new laws and regulations are drafted to regulate the financial industry, but remember the scammer couldn’t care less about laws or rules. THEY ARE SCAMMERS!
In summary, Debt settlement is a last option prior to bankruptcy. You open yourself up to be sued; you have negatives on your credit report due to late payments. You may have a tax liability to pay above and beyond the settlement for the debt that was written off. Exhaust every other possibility before going this route. But if you need to go this route, deal with an experienced firm. Can you do it yourself? Yes you can, however I would not recommend that (unless you have old collection debt, you’re not being sued, and you have lump sum of money available. Get it writing before paying any settlement. Never ever settle an account on just a verbal agreement. Otherwise, hire a professional to properly navigate you through the maze of debt settlement.