The saying goes that if it sounds too good to be true, it often is. This sentiment could not be truer than with debt settlement and debt relief companies. If someone is facing debt collection, he or she is likely to take any help that is offered. And these type companies know it; they prey on your vulnerability. Here are some facts about debt settlement and debt relief companies.
The Perception of What Debt Settlement Involves
It normally starts with the person facing debt collection contacting the debt settlement company. He or she tells the debt settlement company the names of all of the creditors and how much is owed, and the company gives the person an estimate for reducing the debt with a lower monthly payment. The person then stops paying the individual creditors and sends payments directly to the debt settlement company who puts the monthly payments into a “savings account.” Once the account gets to a certain number, the company calls creditors and negotiates a settlement on the amount owed. Seems simple, right? This scenario is actually far from what happens in real life.
Not All Creditors Work with Debt Settlement Companies
The above scenario seems ideal, but it assumes that creditors will work with the debt settlement company. Many companies, like Chase and Discover, however, do not work with these companies, especially if they are for-profit companies, such as Freedom Debt Relief and National Debt Relief. This information is not normally disclosed when a client is looking to work with a debt settlement company, it is discovered usually after it is too late. It is recommended the individual speak with the creditor first to see if he or she can negotiate a lower payoff amount or get set up on an affordable monthly payment plan.
The Problem with the Process
Debt settlement companies do not contact the creditors until the “savings account” they create for the client reaches a certain amount. This delay in letting creditors know what is going on can cause the creditors to file a lawsuit against you, not to mention continue to call you day and night. All that happens is while the client is making payments to the debt settlement company; his or her debts with the creditor become further past due. In fact, the debts could end up in collections and in court. At that point, the creditor can garnish a person’s wages, and it is too late to work out a settlement on the debt owed. The settlement company does not really intend to be in a working relationship with the client, nor do they expect progress to ever be made. In fact, their whole business model is they expect you to cancel after the first year! Also you will have to pay taxes in the amount of debt you do not pay back as the creditors consider it “miscellaneous income” and you will be burdened with a 1099C tax bill. There is not tax debt when you file bankruptcy.
Debt settlement companies can end up charging usually 6 to 10 percent of the total debt owed to set up the account which is outrageous, as well as monthly service fees and a contingency fee based on the amount that is “saved” if a debt settlement is reached. The money that goes into the account ends up coming right back out to pay the debt settlement company. The fee ends up being based on a percentage of the total debt with no guarantee that settlement will ever be reached with all of the debtor’s creditors.
Hit to Your Credit Score
Because of the nature of how debt settlement works, all that will end up happening is the client’s credit score will end up seriously damaged. It can take at least six years from the time the last payment is made on the last debt owed before the individual can begin to recover, if he or she even reaches that point.
The Last Option Is Often the Best Option
Many times, going through debt settlement is only delaying the inevitable. Oftentimes, it is best for the person to go directly to the creditor and see what can be done to get a hardship deferral or reduction in what is owed. Sometimes they will work out a lower interest rate to help their customers get caught up. If that is not possible, bankruptcy is often the best option. An experienced bankruptcy attorney can help determine if you qualify for bankruptcy and get your life back on track financially.
At The Benenati Law Firm, we have helped thousands of individuals and families eliminate their debt and get a fresh start financially. If you have any questions on this topic or are struggling with overwhelming debt, call Orlando bankruptcy attorney, Walter Benenati at 407-777-7777. Attorney Walter Benenati filed bankruptcy in 2008 and can empathize with what you are going through. Ask Walter how you can restart your life. The day you hire our firm, we will contact your creditors to stop the harassment and collection calls. We make our hours convenient for our clients and offer free consultations on Saturdays (9:00 a.m. – 3:00 p.m.) and throughout the week until 5:00 p.m. If you are in a financial crisis and considering filing for bankruptcy, contact an experienced Orlando bankruptcy attorney who can advise you of all of your options.