Debt settlement a 'nuclear option' that most people shouldn't consider

Debt settlement a last optionComplaints about debt settlement companies are on the rise, prompting warnings that dealing with those types of businesses might not the simple solution they might seem for consumers overwhelmed by debt. Only an estimated one in 10 consumers who use them successfully emerge from the process, according to a recent government report.

The Better Business Bureau said it received more than 3,500 complaints from consumers on debt settlement companies since late 2007.

"The whole industry is getting a lot of attention right now because so many people are in so much financial trouble and unfortunately if they get tangled up in the wrong debt settlement company, they end up worse than they began," said Alison Southwick, BBB spokeswoman in an interview with Consumer Ally.


The Government Accountability Office recently released an investigation into debt settlement company practices and found that 17 out of 20 companies sampled impose fees on consumers before settling debts, a practice the Federal Trade Commission has proposed banning.

According to Southwick, typically in the debt settlement process, consumers are told to stop paying their debt and instead pay into an account set up by the company. The consumer pays into the account for years and then after saving a substantial amount, the debt settlement company will try to negotiate with the credit card company to accept the saved amount instead of the full debt owed. The credit card company does not have to comply with the negotiation and Southwick warns that is only one of the many potential problems.

"The problem is you haven't been paying your credit card for years, your debt is mounting, and your credit report is taking a hit and in the meantime, your credit card company can file a lawsuit with you and start garnishing your wages," Southwick said.

The BBB, a membership-based business ethics group, takes specific issue with companies making claims of debt settlement as a "simple" solution "guaranteed to work," according to Southwick.

GAO found the debt settlement companies provided information to consumers that was "fraudulent, deceptive, or questionable" including advertising success rates of the program as high as 100%, according to the investigation report.

"Debt settlement is not an easy fix and if you are going to do it, you really should only consider it before declaring bankruptcy," she said. "Its really one of those nuclear options that you do not want to enter into lightly."

Once entered into the lengthy debt settlement process, it may not be so easy to leave. Southwick cites a consumer who had paid $15,000 into a debt settlement account. When she dropped out of the process, the company refused to return the money.

According to the GAO, FTC and state investigations have shown that fewer than 10% of those entering into the process complete it.

U.S. Sen. Charles E. Schumer (D- NY) introduced the Debt Settlement Consumer Protection Act, which would require increased disclosure, limit fees charged by debt settlement firms and grant greater enforcement power to state and federal officials to go after companies that are taking advantage of consumers.

The FTC warns consumers should avoid companies that:
  • promotes this as a "new government program"
  • guarantee success of making debt go away
  • advise you to stop communication with creditors
  • say that they can stop any debt related collection calls or lawsuits
  • require you to pay a full upfront fee
"You should always contact your credit card company and try to work something out first with them," Southwick suggested. "For some people, who have a little bit of credit card debt, debt settlement is really not for them."

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