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Debt Settlement Companies: The Good, The Bad and The Ugly

Q: I heard an ad for a company. They said that they can settle my debt for much less than what I owe and I can get out of debt faster. When I called them, they also said that after I’m done, I can easily rebuild my credit rating. I’m considering going ahead with this but it just sounds too good to be true; is it?

A. When you’re struggling to pay your bills and you hear an ad like this, it may seem like the light at the end of the tunnel just got that much brighter. However, in the case of debt settlement, there are a number of factors and costs to consider before choosing this course of action. It’s important to understand that your creditors will not accept less than what you owe without carefully examining your overall financial situation. They want to make sure that you are offering as much as you can, regardless of what a debt settlement company may claim.

Other factors to consider are:

Creditors can take you to court if you go on a debt settlement company's program and don't pay them.

  • If your offer is declined, will you be at risk of having your creditors initiate legal action against you by garnishing your wages or seizing your assets
  • What may happen if only some of your creditors accept the settlement offer and others don’t
  • How long your credit rating will be negatively impacted because debt settlement only repays a portion of what you owe. The rest is left unpaid.
  • Fees charged by the debt settlement company – many are charged up front
  • If the company is licensed in your province and if they have a good service record

Many of these companies will ask you to make monthly payments to them and once they have enough money from you, they will try to settle your debts. There’s no guarantee that they’ll be successful or if they’ll return all of your money if they aren’t. They also don’t tell you that during this time, you will continue to receive collection calls because you will be falling further behind.

Before deciding what to do, I strongly encourage you to do your homework and examine all of your options to resolve your financial situation. If you are unsure how to proceed get help from a reputable and accredited organization. What you may discover is that the long term impact of your choice today is much too steep a price to pay.

- Scott Hannah is the President & CEO of the Credit Counselling Society. His weekly column appears on Mondays in the The Province Newspaper and is often carried by other major newspapers across Canada.

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Anonymous

Mon, 09/10/2012 - 20:59

Your articles state that debt settlement is wrong and that we are for profit and can ruin a consumers credit for 6-7 years which is misleading. If the consumer is already in collections doesn't that already impact there credit, also if the consumer enrolls in a non profit organization which we all know it is for profit by the consumers money that gets paid out by the banks doesn't credit counseling report to the credit bureau also and effect the consumers credit. It is so easy to judge debt settlement because of other companies in the states that enter into Canada, but the real fact is we are here to help consumers get debt relief. Why don't you point the facts on how credit counseling can effect ones credit and how a non profit organization is actually a profit organization but the consumers don't actually know where say there $100 payment goes when really $80.00 goes to the bank and $20.00 to the credit counseling company which by the end of the term the company makes money and lot's of it

<p>You make a great point, and that is that not all debt settlement companies are taking advantage of people. Many are but not all. What is so troubling about what many debt settlement companies are doing is that they are advertising their services to the general public and making it look like their service is a viable option for a great many consumers when the truth is that their service will only work out as advertised for around 1% of the people who sign up for their program. In the end the vast majority of their clients will be left worse off with more debt, less money, and damaged credit. These people then come to us, and it then becomes our job to help them put together the pieces and find a way out of the mess that they were lured into.</p>
<p>It is unfortunate that the small number of people out there that are providing legitimate debt settlement services are tarnished with the same brush as the guys who are taking advantage of people, but how is the average consumer supposed to tell them apart? One way may be to look at the company&#39;s Better Business Bureau rating. If a company has maintained an A+ rating for more than 3 years, then they are likely one of the better players out there.</p>
<p>In the work that we do, we also get tarred with the same brush as credit counselling agencies who do not uphold our high standards or are not able to do as much for people as we can. Your comments reflect some of these common misperceptions:</p>
<p>1. We do not offer our Debt Management Program (DMP) to 80% of people who seek our help because it is not the right fit for their financial situation. When we do suggest that a DMP is an option, we always fully disclose the impact that it will have on the client&#39;s credit. However, we also make them aware that 2 years after they finished their program we will erase all record of their debts that were on the program from their credit report and provide them with a fresh start.</p>
<p>2. Our clients are fully informed of where their money goes. We provide them with a statement each month - as do many of their creditors. We are transparent with everyone who asks how we are funded. It&#39;s actually a brilliant funding model where creditors help to pay for people to get debt help and interest relief. From a consumer&rsquo;s point of view, what&#39;s not to like about it?</p>
<p>At the end of the day if we have any surplus revenues, they are plowed right back into expanded services or community education. You can see for yourself we are accountable to the Canada Revenue Agency as a registered charitable society. Our financial information is published each year on their website along with our salaries. You can see for yourself that no one here is making a profit. We are non-profit in every sense of the word.</p>
<p>For the benefit of skeptical people and to promote greater accountability, we annually open our books to an external auditor. The auditor then reports to our volunteer board of directors - many of whom are well known leaders in their communities. To our knowledge we are the only non-profit organization in our industry that does this.</p>
<p>But what&rsquo;s most important is that at the end of the day our results speak for themselves:</p>
<ul>
<li>
We survey over 10,000 of our clients every year, and currently 98% of them report that they would recommend our services to others.</li>
</ul>
<ul>
<li>
Our Debt Management Program has a success rate of over 88%.</li>
</ul>

Published on: October 21, 2010