With so many Americans in dire financial straits these days, it's no wonder that advertisers of "settle your debt" services for debt management have found an eager audience. These companies promise to slash your debt by thousands, even tens of thousands of dollars. But is it too good to be true?
"In my opinion, it's a questionable industry overall," Linda Sherry, director of national priorities for watchdog group Consumer Action, told WalletPop via e-mail. "Why should any company be allowed to take its fees before the promised service has been delivered or accomplished?"
As this Bankrate.com article points out, even consumers deeply in debt have a lot to lose by using one of these operations. Christopher Kukla, senior counsel for government affairs at the Center for Responsible Lending, explained in an interview with WalletPop just how these "debt settlers" work.
Debt settlement 101
There are actually three types of organizations out there. First are nonprofit debt management counselors. These organizations and the people they employ put their customers first, since they aren't looking to make a profit. If you're in need of such a service, Kukla recommends reaching out to the Department of Housing and Urban Development, especially if your bill-paying struggles extend to your housing costs, since their housing counselors can help out managing your other types of debt, too.
This is the most legitimate of the three options, but it's not a quick fix. You can expect a payment plan and a long-term commitment to paying down your debt.
The second option, for-profit debt management companies, works similarly, but these type of companies charge fees for their services, and they generally take a cut of any payments you make (they'll have you send the payments through them, so they can take some off the top before sending the remainder along). They may make big promises -- and can deliver. But if you're already in fiscal hot water, paying yet another service provider -- especially for something you could get from a nonprofit -- probably isn't the smartest move.
Finally, Kukla says the ones you really want to avoid are debt settlement companies. These are the ones whose ads you're most likely to hear on TV or radio, promising to let you off the hook for the thousands of dollars you're in debt. Their offer might sound tempting, but don't bite, Kukla says.
Here's why: If you sign up with a debt settlement company, they'll tell you to send your monthly payments to them rather than to the creditors. However, they don't send this money along to the creditors right away. The idea is that they'll accumulate several months' worth of payments for you, then turn around and offer to settle your debt for that lump sum.
There are a couple of big reasons why this is a bad idea. First of all, nonpayment of your bills will wreck your credit score, even if you manage to settle the debt later. At worst, you can be sued, and at best, you'll be subject to months' worth of annoying phone calls from the creditors who want to know why they haven't been paid.
Second, debt settlement companies take their (often substantial) fee right off the top, so those first few months of payments you think you're making to get yourself out of the hole are really just going into the pockets of the debt settlement company executives. According to Kukla, roughly 60% of people who sign on with one of these companies throw in the towel within six months and have to start from scratch chipping away at their debt (which has undoubtedly been magnified by the addition of late and nonpayment fees).
That old saying about avoiding things that seem too good to be true is sage advice here. There are no quick fixes for getting out of debt, and companies that say otherwise could leave you in even worse shape.
If a company offers debt management, be wary