If you're thinking about using a debt consolidation or debt rnsettlement service to help you get out of debt faster and save rnmoney on your monthly payments, make sure you do your homework rnbefore choosing a company. There are definitely shams and scams rnout there.
First let me say that debt consolidation is *not* the same as rndebt settlement/negotiation, which most people don't realize.
Debt settlement companies charge hundreds of dollars as an rninitial "admin fee" to set up your account, plus a monthly rnservice fee. The fees vary depending on the company and the rnamount of your debts.
Such companies take your money every month, but don't make rnmonthly payments to your creditors! Instead, they put it in a rntrust account, negotiate your debts with your creditors, then rnmake a lump-sum payment when there's enough in your account to rnpay a creditor in full.
That can take *years* depending on the amount of debt you have rnwith each creditor. Meanwhile, you can be sued by your creditors rnand your wages can be garnished! (Or just don't make payments to rnyour creditors. You'll end up in the same spot without paying rnsomeone to help you get there!)
Settlement companies don't ask your creditors to stop all rninterest, late fees and overlimit fees from accruing. That means rnwhile the negotiations are ongoing, your bills will continue to rngrow! So if you're sued and a judgement is brought against you, rnyou'll owe more money than before!
And shoddy companies, which there are alot of, don't tell you
*any* of this up front. I call it "getting permission by rnommission" because they simply don't tell you how their program rnworks *before* you sign an agreement with them. Or after, for rnthat matter. But if you ask the right questions, eventually rnyou'll figure it out. (Or when the crap hits the fan. Whichever rncomes first.)
Let me give you an example of how debt settlement works.
Let's say you have $20,000 in unsecured credit card debt. You rnowe $10,000 to one credit card company, $6,000 to another and
$4,000 to a third. You agree to a 5 year plan where you pay $250 rna month to the settlement company. (After all, $250 a month for rn60 months is only $15,000, so you're saving $5,000 and you'll be rndebt-free in 5 years, right?)
The admin fee will cost you $750. Your first 3 monthly payments rngo towards that and nothing gets put into your trust account rnuntil your 4th month.
The settlement company keeps $50 of your $250 payment each month rnfor the service fee. That means $200 a month is being added to rnyour trust account.
Most debt settlement companies claim to be able to negotiate rnyour debt for about 50% of what you owe. So let's use the lowest rncredit card debt as an example.
If you owe $4,000 and your creditor agrees to accept $2,000 as rnpayment in full, it will take 10 months at $200 per month to rnhave enough in your trust account to pay off just that one rncredit card.
But remember, your first 3 payments to the settlement company rnonly paid the admin fee. That means your first credit card rnsettlement is 14 months *after* you started sending them money.
So what's the problem? It's simple. Your creditor won't agree to rnaccept half of your actual debt unless, or until, it can be paid rnin full. Otherwise, you're expected to make your normal monthly rnpayments.
Since you don't have $2,000 in your trust account, and you won't rnhave it until more than a year after you stopped paying your rncreditor directly, they'll probably take you to court and rnrequest that your wages be garnished long before you have that
$2,000 built up.
And what about your other creditors? Well, they'll be waiting rneven longer to get their money from the settlement company. The
$6,000 debt will take 15 *more* months to pay off, assuming your rncreditor waits that long and agrees to 50%. And that $10,000 rnbill? You do the math.
On the other hand, if you signed up for a 3 year plan with the rnsettlement company, your debts would be paid off sooner. But, rnthe question is, will your creditors wait that long? Probably rnnot.
The facts are, you can negotiate with your creditors yourself. rnMost will agree to take a smaller monthly payment from you and rnstop all interest and fees from accruing. And, of course, you'll rnsave thousands of dollars in fees to a settlement company.
Before signing up for any service, please be sure you check out rnthe company thoroughly. And don't let the words "non-profit" rnfool you either. Alot of debt settlement companies claim to be rnnon-profit.
Going back to the example above, if you pay them $15,000 over a rn5 year time frame and they settle your debts at half of what you rnowed, they'll make $5,000 from you. I'd call that a profit, rnespecially since they might not have actually helped you in any rnway.
Most companies will allow you to cancel your account and get a rnrefund of what you've paid, less the non-refundable admin fee rnand the monthly service fees. If you feel you've been mislead rnabout their program, don't hesitate to argue til the cows come rnhome. File a complaint with the Better Business Bureau or hire rnan attorney if you feel you're getting nowhere.
You can visit the Better Business Bureau's website (
http://www.bbb.org) rnand find reports on hundreds of companies. Here's a small rnlisting of companies that have poor reputations with the BBB:
National Consumer Debt Council LLC - Irvine, CA (A.K.A. NCDC, rnUnited Consumer Law Group)
Financial Rescue Services - Burbank, CA
Debt Legal Services - Anaheim, CA
American Debt Relief - Los Angeles, CA (A.K.A. A M Debt, rnAmerican Debts Relief, Debt Relief)
Please be very cautious when choosing a debt help company and rnask lots of questions before agreeing to anything. If you find rnthey're evading your questions, run fast and run far. There are rnreputable companies out there, so keep looking until you find rnone.