Sunday, March 9, 2008

Warning: Debt Settlement Firms are Simply a Scam

With an increasing number of consumers under stress with high debt levels amidst a deteriorating economy, many are turning to Debt Settlement firms with hopes of salvaging their financial situation. By having you pay monthly sums to them while withholding payment from creditors, these debt settlement firms claim to have the power to negotiate a lump sum settlement with the creditors. BusinessWeek outlined the problems with these firms in a recent Look Out for That Lifeline article.

The reality is that most of these firms simply collect the money and never contact the creditors. Usually the debtor is left in worse shape with daily collection agency calls, additional fees, penalties, higher interest rates, and bad marks on their credit reports.

Most debt holders on these plans also don’t recognize that most of these firms collect 30% or more of the money as fees for their “settlement activities”. ‘The programs typically require financially strapped consumers to pay fees up front, so they make money whether or not any useful services are performed," says Philip Lehman, an assistant attorney general in North Carolina.’

Most banks including Bank of America and Discover Financial Services refuse to negotiate with settlement firms; this means that in many cases that these firms are promising to deliver a “service” that is not viable. The State AGs in half-a-dozen states are currently investigating a significant number of these debt settlement companies due to the high levels of complaints.

Currently seven states have banned settlement activities; it would be wise to urge your state politicians that these debt-settlement scams be banned in all states. The firms are nothing more than the latest incarnation of predators on stressed consumers.

For those who need financial help, it is better to turn to a credit-counseling agency rather than a debt-settlement firm. Most communities have non-profit credit counseling resources available.


Debt Free said...

I disagree that ALL debt settlement firms are scammers. As a consumer, you need to look for the ones that you pay on a performance basis - that is, as they get you the settlement in writing, then you pay. And there are lots of these performance-based debt settlement companies out there that are doing debt-laden consumers a favor.