Many people are enticed into signing up for debt settlement programs by wonderful sounding TV and radio ads or slick salespeople who seem to almost guarantee results and an easy way out of debt problems. However, if a debt settlement is not the right fit for your financial situation or if you deal with a debt settlement company that is not completely open and honest, you can easily end up with more problems than you started out with.
Grave concerns about for-profit debt settlement companies
Many American debt settlement companies have been promoting their services in Canada. Some of these companies are even dressed up to look like Canadian companies with offices in Canada. However, the following facts can generally be applied to most for-profit debt settlement companies:
After receiving hundreds of thousands of complaints, the U.S. Federal Trade Commission (the U.S. consumer protection watchdog) asked the U.S. Government Accountability Office to investigate for-profit debt settlement companies and here is what they found:
- The success rate of for-profit debt settlement companies is less than 10%.
- 65% of people who pay fees to these debt settlement companies leave their programs without ever receiving a settlement.
- The amount of money that people pay in fees to these companies almost equals the amount of money that they save. However, this is before creditor late fees, penalties and interest are added in (these can often double or triple a debt by the time a settlement is negotiated). So at the end of the day it seems fair to say that the vast majority of people who deal with these companies do not save any money and are often left worse off in the end.
This situation is best summed up by Federal Trade Commission Chairman, Jon Leibowitz, when he concluded, "Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy.” Source: FTC Website
In addition to the dangers outlined by these U.S. government agencies, here are more hazards of pursuing a debt settlement with a for-profit company:
Creditors can refuse to cooperate
A growing number of major creditors are refusing to deal with for-profit debt settlement companies. They instead insist on only working with reputable, non-profit organizations that they trust. Unfortunately, many for-profit debt settlement companies do not disclose this to their clients up front. Imagine signing a contract and finding out after the fact that some of your biggest creditors won’t deal with the company you signed up with. We believe that disclosing this after a debt settlement agreement is signed is both unethical and dishonest.
Creditors won’t wait for a debt settlement company
Debt settlement companies typically work by getting you to make monthly payments to a new bank account. Once enough money has accumulated in the account, they can then make their first settlement offers to some of your creditors. This may work out for some smaller debts, but what about larger debts? How long is it going to take to save up enough money to settle a large debt, and are your creditors going to wait that long? Usually they won’t, and while you’re making payments to accumulate the money for the settlement, your debts become further and further past due.
Creditors can take you to court
While you are making payments to a debt settlement company’s bank account or your own separate account, your creditors are getting nothing. So they of course will typically pursue all collection options available to them. This can include sending collection companies after you, taking you to court, seeking a judgment against you, and using the judgment to garnish your wages or put a lien on your house. Most people abandon a debt settlement program when these things start happening, and then they are often left worse off than when they started their debt settlement program.
A debt settlement program can ruin your credit for 6 - 7 years
A debt settlement will have a dramatic, negative impact on your credit report and your credit rating. Debt settlements done through for-profit companies will significantly damage your credit for at least 6 full years from the time the last payment is made on each debt. However, many reputable non-profit organizations have the authority to erase all records of the debts that you settle through them after 2 years. So 2 years after you settle your debts with a trusted non-profit organization or debt relief service, it’s possible to have a clean slate and get a fresh start.
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