One could justify the fees charged by the debt settlement (DS) companies if they actually earned those fees. Unfortunately, it is not easy to determine what the companies actually do to earn these fees. If you are not familiar with the various fees that debt settlement companies charge, you should read, "Hiring a Debt Settlement Company - The Fees."

With Outrageous Fees, How Can I Save Any Extra Money?

Most consumer debtors have less income than expenses each month or they wouldn't be in financial trouble. Some, with budget counseling or other assistance, are able to squeeze out some additional money from their budgets each month.

There is likely a small subset of consumer debtors who meet this profile. However, it is unlikely that this is a very large group. The question is whether this subset of debtors who have only a small amount of money left over each month after paying necessary expenses can truly benefit from debt settlement. Settling a debt is expensive and seemingly impossible enough, not to mention the fees associated by hiring a DS company.

How a Debt Settlement Company Operates

It's not in your best interests to hire a third-party debt settlement company. First, a debt settlement counselor discusses a payment plan with the client. After a comfortable payment is decided upon, the counselor then explains that the payments that the client sends in each month do not immediately get paid out to the creditors. Instead these payments are put into a bonded savings or trust account until enough money is accumulated to offer a creditor a lump sum of cash to "settle" the account all at once. The counselor usually suggests that the creditor will accept 40 to 50% of the total amount of the debt.

By this time the client is usually a little hyper because they have just realized that they will be making monthly payments and nothing will go to the creditors for months and months. The counselor then calms the client down by saying don't worry, this is perfectly legal and we get paperwork out to your creditors, letting them know that you are on a settlement program. This "paperwork" means nothing to the creditor and is completely useless. Avoid a DS company at all costs and learn about the best strategies to fight your debt, coerce a great settlement, and maintain the upper hand in "The Debt Settlement Process."

Dissecting Common Advertising Claims

A DS company's main goal is to have consumers believe that they simply cannot get low settlements on their own. A company may tout their expertise, claiming for example, that since consumers wouldn’t fix their own plumbing, why would they fix their own debt problems? Let's break down their claims.

Claim #1: Because we (the DS company) have great relationships with creditors, we can get the best settlement offers and work to cancel debt by using “secret programs."

Reality: Most, if not all creditors and collection agencies hate DS companies. One of the main reasons is that DS companies actually encourage people to default on their current debt obligations. Another rationale is that the fees charged by these credit card companies could be better used in financing your own indebtedness. Creditors prefer to negotiate directly with the debtor. In fact, if they find out a professional is on the job, they often immediately sue the client. Credit Cards for Bank of America and CITIBANK, have recently made the proclamation they will no longer deal with debt negotiation companies. 

Many of the big credit card banks automatically send out settlement offer letters or make verbal settlement offers right before charge-off and also during the collection process. Creditors see the logic of settlement and they frequently extend these offers when the account reaches a certain stage, usually about 5-7 months after a debt has become delinquent. When the DS company gets the same offer as you would, all they're going to do is take it on your behalf. In many cases, all that is necessary to obtain a 50% settlement (or less) is to accept the letter that comes in the mail automatically!

There are no secret programs available for the purpose of settling debt. The only opportunity to settle a debt is when a creditor authorizes and sends a settlement offer.

Claim #2: We work with credit-card issuers to cancel outstanding debts.

Reality: Settling a debt means the debtor has to pay a lesser amount of his or her initial balance. The remaining balance is considered forgiven and the debtor will likely have to pay income tax on the forgiven debt. Once the creditor has agreed and signed a written settlement offer, they must forgive the debt and cannot collect it anymore.

Claim #3: We can cancel up to ____% (e.g., 60%, sometimes greater, or a range) of outstanding credit-card debt.

Reality: The use of the phrase “up to” does not grant an advertiser license to promise only its most dramatic results. An “up to” claim should reflect the performance or result that can typically be achieved. DS companies commonly advertise their best, and usually rarest, results.

Claim #4: We can either stop your creditors from calling or handle the calls on your behalf.

Reality: The Fair Debt Collection Practices Act allows the consumer the right to write a "cease communication" letter and stop collection calls only from a debt collector. The FDCPA does not pertain to the original creditor and you cannot legally stop them from calling you.

Even though a debt collector may advertise that they can stop all the "harassing" collection calls, debt collectors will still call you. Unless a consumer appoints the DS company as their limited power of attorney, the DS company has no authority to write the debt collector a cease communication letter and enforce its power. Below, we will discuss why writing a cease communication letter is not always in your best interest.

Claim #5: Your credit will improve when finished with the program.

Reality: Once a debt is settled, the phrase "settled for less" will appear on the credit report and is considered a negative standing. A negative account will have a lesser impact on your credit as the account becomes older. DS companies usually don't mention the negative consequences associated with DS, but if a client completes a DS program, they will likely have terrible credit.

Main Problems with Debt Settlement Companies

Hiring a DS company is not only a waste of money, but is very risky.

• Debt Settlement May Not Be Someone's Best Option; Debt Settlement Companies Don't Care

Depending on the situation, debt settlement is sometimes not the consumer's best option. Unfortunately, DS companies care only about getting customers and do not seek the consumer's best interest. Because DS companies don't screen their clients to see if they are good candidates for DS, society's insolvent customers will suffer the most. The insolvent consumers who's liabilities surpass their assets and who don't have enough month at the end of their money should probably look at filing either a Chapter 7 or 13 bankruptcy. To see if and when you should use debt settlement, read "What's Your Best Option."

• Few Consumers Complete Debt Settlement Programs

Nearly all DS companies state that the ideal customer will have multiple debts. Debt settlement companies settle debts for customers, if at all, one debt at a time. The problem is that it takes years for a debtor in a hardship situation with multiple debts to ever set aside sufficient funds to settle all debts. In the meantime, the consumer continues to face collection tactics, compounding fees and interest and delinquencies on their credit reports.

A receiver’s report on National Consumer Council (NCC) and affiliates documents this concern. NCC admitted to the receiver that at least three months were usually required to pay off the initial establishment fee and accumulated monthly fees.

They also conceded that their assumption was that creditors were more willing to compromise after 6 or 7 months delinquency. The statistics compiled by the receiver showed that a mere 1.4% of the consumers that entered the program completed it. 43% cancelled after incurring fees. A principal at NCC described the settlement process as a “fire walk” for consumers that lasts 36 to 42 months.

• Exorbitant Fees

One of the key reasons why consumers will rarely benefit from debt settlement is because they have only a small amount of money, if anything, left over each month after paying necessary expenses. Read more about the exorbitant fees DS companies charge clients in "Hiring a Debt Settlement Company - The Fees."

• Questionable Value of Services (if any) Performed

In research done by the National Consumer Law Center, the debt settlement trade association (USOBA) and DS companies either refused to speak with the surveyor or provided vague responses. Their survey showed that when asked what services were offered to consumers, all the DS companies stated they had:

• Highly trained negotiators
• Experience in knowing how creditors settle
• No personal emotional attachment to creditors, allowing better responses
• Extensive knowledge in consumer debt and in Fair Credit Reporting Act (FCRA) and Fair Debt Collection Practices Act (FDCPA), even though they are not lawyers
• Educational tools
• The ability to stop creditor harassment

It is difficult to translate these general claims into actual services offered. In most cases, DS companies perform menial tasks such as mailing out form letters to the client and responding to client’s occasional phone inquiries as to the status of her case. Typically, DS companies will not even contact the creditors, until after the consumer has deposited enough money into the trust account to make a lump sum payoff to the creditors, which often does not occur until many months after the consumer has enrolled in the program

In a specific case, a client withdrew from a DS program and demanded that the company provide an explanation for the costs. When taken to court, the court found that the work performed was of no value to the client. The firm at no time initiated negotiation with the creditor. Further, the automated or routine tasks actually performed did nothing to advance her goals. Ultimately, the client negotiated a payment plan directly with her creditor without any assistance from the firm.

• Advising Consumer Not to Pay Debts

Some companies openly admit that they advise customers to stop paying their debts. One company representative explained that making payments undermines the position of the negotiator and that the consumer should be saving money for settlement. One law firm debt settlement company in its initial letter to clients reminds them, “Do not send your creditors any money.” They explain that this interferes with the entire process. Others clearly imply that consumers should stop paying. For example, one company representative told us that they can’t tell consumers not to pay creditors, but this is what consumers need to do because the longer they’re not paying the creditors, the better deal they will eventually get from creditors. According to the representative, after twelve months of not paying and not talking to creditors, they will feel that some money is better than none.

In a 2004 lawsuit against Better Budget, the FTC alleged that the defendants tell consumers to stop paying their creditors because failure to pay will demonstrate a “hardship” condition that will enable the settlement company to negotiate. Not paying any other bills except for a house bill will result in serious consequences. When a consumer stops paying all other credit card debts they will likely face new collection calls and probably more lawsuits.

• Writing a Cease Communication Letter

In most cases, consumers don't want to deal with creditor phone calls. Unfortunately, if you have delinquent debt, you'll have to deal with them anyway. To permanently stop all collection calls, the Fair Debt Collection Practices Act (FDCPA) allows you to write a cease communication letter. This may let you rest in ease, however it's an OBSOLETE and DANGEROUS technique.

It is obsolete because it has been over-used, to the point where many collectors routinely ignore such letters. It is dangerous because many creditors react harshly and negatively to such letters, to the point where they ACCELERATE the collection process by sending the account to an attorney for litigation. When a debt initially becomes delinquent, the creditor will call and harshly demand their money. After a month, they may simply assign the account to a collection agency. Either way, the debt collector just wants to know they can continue to verbally communicate with you. When you send a cease communication letter, you leave them two options: either send you a settlement offer or a litigation letter.

Instead of writing them a cease communication letter, you should change your phone number, or use a combination of caller ID and call screening to cut down on the collection activity. In conclusion, there is nothing that a settlement company can do to block creditor harassment that you cannot do for yourself, with less risk and less expense. Read more about the "Do's and Don'ts of Debt Settlement."

• Loss of Consumer Control and Decision Making

All DS companies require that consumers set up an account and send monthly payments to that account. The companies take their fees from this account each month before crediting anything to the consumer’s reserve. Even a surveyed company that stated that “the consumer is always in control of his money” admitted that with the consumer’s approval, they deduct their service fee from the account.

Many companies require consumers to give up control of these accounts by requiring them to sign a power of attorney. The FTC lawsuit against National Consumer Council describes how the company required consumers to sign a power of attorney to allow the company to act as attorney in fact. The same allegations were made in cases against Better Budget and Briggs and Baker. There is always potential for abuse when a company requires a consumer to sign a power of attorney and give up control in this way. In do-it-yourself DS, you control when the money is saved, how much, and how to negotiate with your creditor.

• State Debt Settlement Laws

Nearly every state has a law that regulates for-profit debt management services. More than half of these laws cover debt settlement services as well. Only a couple states fail to prohibit or restrict debt settlement companies. Most state restrictions include a licensing requirement. Certain entities such as non-profits or attorneys may be exempt from licensing. Most states also have fee limits which limit how much a debt settlement company can charge for their services. Other states have bond requirements for the purpose of refunding unsatisfied clients. DS companies routinely ignore and violate many of these state provisions, which is yet another reason to "The Debt Settlement Process." Below is a list of states that completely prohibit for-profit debt settlement or debt adjustment.

Arkansas: Ark. Code Ann. §5-63-301 et seq.

Hawaii: Haw. Rev. Stat. §446-1 et seq.

Louisiana: RS 14:331

 

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