Debt Settlement; Too Good to be True?

We have all seen the TV commercials or heard the radio ads telling us, that we do not need to repay our credit card debts in full. Better yet, we actually have the right not to pay our creditors. Truth is we do have the right not to pay our credit card accounts. We also have the right not to pay our mortgage loan, our car loan or our electric bill. However, it is also true that our credit card companies, our mortgage lender, our car finance company, and our electric company all have legal rights to collect the money we owe them, including suing us in court, foreclosing on our home, repossessing our car, and cutting off our electric service.

So if the old adage “If it sounds too good to be true, it probably is” comes to mind, consider the following about these Debt Settlement claims.

Debt Settlement is the process of negotiating with your creditors to get them to accept less money than what you owe them. You can do this yourself or hire a debt settlement company to do it for you. The important thing to understand is that your creditors will only accept less money from you if they believe you are unable to repay them in full. And a key to making your credit card companies believe you cannot pay them is to actually stop paying them. Credit card debts are not secured by anything you own that a creditor can take back from you, like your home mortgage loan or car loan, and may be eliminated or substantially reduced by filing bankruptcy. Simply put, the credit card companies will accept a settlement for less than you owe them, out of fear you may file for bankruptcy protection and they will be paid less or nothing at all.

So just stop paying your credit card companies and they will offer to settle your debts for less than you owe. Can it be that easy? Not always, and not without paying a price.

When you stop paying your credit card debts, your creditors will report your accounts delinquent to the major credit bureaus and start their collection efforts. The longer you go without paying, the more delinquent your accounts will become, the more it will reduce your credit scores and the more your creditors will try to collect. If you owe a substantial amount of money to a credit card company, they may also choose to exercise their right to sue you. Debt settlement companies may send your creditors cease and desist letters and take other measures to limit their phone calls and attempts to collect from you, but the creditors right to collect the debts you owe them does not go away.

While you are not paying your credit card accounts, debt settlement companies will set up a separate escrow account for you to make monthly payments. The payments you make will accumulate until enough time has passed and there are enough funds in the account for a debt settlement company to negotiate a settlement with one of your creditors. Typically, debt settlement companies will look to settle your smallest account first, so that they can show you how great the plan works and, most importantly, start charging you their fees. And about their fees, they are not cheap.

Debt settlement company fees vary depending on whether they are licensed in the state you reside, are operating without a license, or are taking advantage of some kind of exemption from the law like offering their services through an attorney network. Most often, debt settlement companies charge fees as a percentage of the debt you hired them to settle (typically 15 to 25%) or a higher percentage of the amount they save for you on settlement. Whatever method they utilize, their fees are significantly higher than those charged by nonprofit credit counselling agencies for debt management plans. More importantly, they can be avoided totally if you settle the debts yourself.

It is also important to know that state and federal laws do not allow debt settlement companies to charge you fees before they start settling your debts. If a debt settlement company quotes you fees to be paid in advance of your debts being settled you should look for a more reputable and licensed company.

Is debt settlement a bad option? Not necessarily. However, you should understand how it works, the impact it will have on your credit, and the increased collection efforts and fees you will likely incur from your creditors.

Before leaping into a debt settlement plan based on an advertisement or sales pitch, consider other options that may be available and more suitable for your personal situation. Most major credit card companies have internal plans that provide short-term relief for their cardholders. If long term relief is needed, consider debt management plans offered by nonprofit credit counseling agencies, which are accepted by your creditors.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email is located at 1330 SE 4th Ave, Suite F, Fort Lauderdale, FL 33316.