Debt settlement, sometimes referred to as debt consolidation, is touted on television commercial after television commercial as a cure for overwhelming debt, be it medical, maxed out credit cards, or unsecured loans and ‘store’ cards.
What is it? What do those smiling people in the advertisements really do?
First, most television spots are paid for by a company who solicits calls to their toll free line, with “operators standing by!” These companies then sell, that’s right, sell, the list of contacts, numbers and email addresses, to the real company which will (hopefully) do the work.
So, what is the work they do? And how does it work, or not work, for the person who responds to the TV ad or the myriad of online ads?
Debt settlement for the average financially stressed person works like this. Say a person owes six different accounts, with a total balance of $40,000. If that borrower stops paying those monthly payments – assuming he or she had been paying them and the monthly payments amounted to $500 – over, say two years, if the borrower spent none of that money for anything at all, but saved it, that borrower would have $12,000.
The borrower does this at the direction of the (usually for-profit) private debt settlement company that called back from that toll free call, or emailed back. Paperwork was signed. And the borrower, as part of the signed agreement, sends the money described above to an account somewhere else.
Then assume that the whole time, while not being paid, the creditors didn’t sue or do anything nasty, such as relentless phone calls, etc.
Now the debt settlement company calls up each unpaid account, and talks them into settling for as low an amount below the balance as they can talk the account holders into.
The debt is gone. So what is wrong with debt settlement companies? Why, when a borrower types their debt settlement company name, or the name of a company they may hire, into an online search engine along with the word “complaint,” numerous negative comments pop up?
Here is what is wrong. First, these companies generally charge a minimum fee, often to be deducted from the distressed consumers deposits, before any work is done. Current restraints do exist in some telephone solicited business which don’t allow up front fees until at least one account is settled (visit this link —Bankrate.com— regarding the Federal Trade Commission’s ban on upfront debt settlement fees by for-profit companies and services that are sold over the telephone.) But, you’ll pay fees.
Second, many companies, sadly, are frankly crooked. They’ll hide behind a P.O. Box, never answer complaints, tout success rates that are unrealistic, and won’t necessarily stop deductions of the payments if the consumer needs the funds.
Third, the monthly payments may be unrealistically high, depending on how much debt has to be settled.
Fourth, the deductions for the payments are often from the consumers account, which is already under stress. The borrower can lose track of their creditors, not remember who they were, believing the debt settlement company has it all under control. But, the creditors can continue to call, add fees, report the debt as bad debt, delinquent, and/or charged off, sell the debt, that’s right, sell the debt, and sue in an attempt to establish a judgment and garnish wages or a bank account.
Fifth, a creditor who receives less than full pay off of its claim will claim that loss with the IRS on a form called a “1099 debt cancellation form.” This is treated by the IRS as if the borrower actually received that money.
What we do at our law office is evaluate, realistically, if debt settlement will work for our prospective clients. The idea that you can save the funds to settle with the creditors, and be left completely alone during that time, is generally unrealistic. We do assist clients in settling these claims, if bankruptcy isn’t right for them, but only if the client currently has funds, now, that they can dedicate to settling debt.
So, our advice is, read the fine print before agreeing to anything. And if it sounds too good to be true, it probably is. We’ve successfully settled debts for clients that were not eligible for bankruptcy and had the funds to settle those debts. Do keep in mind, most companies will send a 1099 that reflects the amount of money the creditor had to write off.
Our office offers free initial consultations on these matters and will always give you realistic advice on your options.