Are Debt Settlement Companies Scams?

Are Debt Settlement Companies Scams?

Freedom Debt Relief. National Debt Relief. DMB Financial. Are they any good?

Bogus Promises of Credit Card Help

According to the Federal Reserve, the average household in the United States owes over $16,000 in credit card debt. Lots of people are struggling to keep up with their credit card payments. And - just ten credit card companies control nearly 90 percent of the credit card market. 

Credit card companies usually raise interest rates for any reason or no reason at all, and it's not uncommon for interest rates to reach nearly 30 percent. 

The credit card industry, on the other hand, collects billions of dollars in penalty fees from consumers who paid their bills even a day late, over-extended their credit by even a small amount, etc.

There are a lot of companies trying to take advantage of the fact that a lot of consumers have trouble paying their credit card bills.

It is important to remember that there is no such thing as an easy way to lower your interest rates or get out of debt. Be mindful of companies that call you up and promise them “insider secrets” on how to lower your credit cards interest rates.

 

What the Debt Settlement Company Won't Tell You

Most debt settlement companies do not fully explain to their customers the risks they are taking by hiring a company in the first place. 

Why is that not true? Because debt settlement agencies are for-profit businesses. They aren't in business to help you out or care about the condition of your personal finances. They want to make a buck, and some of them are outright scammers.

In almost all cases, it is much better for you to use the money you would have been paying the debt settlement company for the purpose of paying down your debt. If you do not have the money to pay it down then you can hire a reputable lawyer to help you.

Here are a few of the disadvantages in using the services of a debt settlement company that probably won't be addressed by the company.

In spite of the fact that debt consolidation can offer some advantages, it is not a matter to take lightly. It could end up costing you money in hidden fees, lawsuits, garnishments, and tax liabilities, and more importantly—it could cost you your home.

If you use collateral for your debt consolidation loan, such as your home or a car, you could lose that property if you default on the loan.

Additionally, if a bank gives you a debt consolidation loan, a cross-collateralization clause may be present, which permits the bank to take other property it has financed if you default on the loan. 

For instance, let’s say that you have a car loan through your credit union and then the credit union gives you a debt consolidation loan. The cross-collateralization clause means the credit union could seize your car if you don't make your car payments, even if your car's payments are current.

Hidden costs. Debt consolidation loans seem like a good idea, but you could wind up paying more overall. If you stay in debt longer, you might end up paying more in the long run. Debt consolidation helps you get lower monthly payments and interest rates in exchange for an extended repayment period.

Negative tax consequences. The IRS may tax your debt relief savings, so you'll have to pay taxes on them if you use debt consolidation. Credit card companies and other creditors' debts are reported to the IRS, so it's taxable.

Lawsuits. Debt negotiation companies often "forget" to mention that you will be sued by your creditors. Unlike bankruptcy, debt settlement companies have no way to prevent your creditors from suing you, getting judgments, and garnishing your paycheck or emptying out your bank account. Bankruptcy prevents all of these with an order from a federal court.

Lawyer vs. Debt Settlement Company: Which Should I Use?

You're better off hiring a lawyer or doing it yourself if you need help negotiating with your creditors rather than working with a debt settlement company.

A lawyer works for the client, not for the lawyer. A lawyer has a legal obligation to tell you what's best for you, not for their company.

Your creditors may not agree to negotiate

Not only is a debt settlement not always successful, but some creditors will refuse to negotiate with debt settlement companies.

You could end up with more debt

You can get hit with late fees or interest if you stop making payments. You could even be sued by a creditor or debt collector if you quit paying. Additionally, if the company is successful in negotiating a debt settlement, whatever amount is forgiven to you might be considered taxable income on your federal tax return.

You may be charged fees, even if your whole debt isn't settled

Fees don't go to debt settlement companies until they reach a settlement agreement, you agree to the settlement, and you make at least one payment to the creditor or debt collector. Typically, you don't have to pay on the rest of your debts, but if you have a lot of credit cards and they settle one of those debts, the credit card company can charge you once they receive the settlement results.

A debt relief company can charge you the same proportion of its total fee if they settled a certain percentage of your debt.For example, if your total debts are $10,000 and you settle $5,000 of them, the company is allowed to charge 50% of the total.

Check out this video by the New York Times about how bad debt settlement is for consumers.


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