5 Reasons to be Wary of Debt Settlement Companies

May 30th, 2009 • Related • Filed Under • by Debbie Dragon

We know that there are many companies out there that are offering debt settlement services that should be avoided. While there are questionable companies and practices in any industry, these are particularly concerning since these companies are supposed to be helping consumers, not hurting. But, they exist nonetheless, so here are five reasons to be wary of debt settlement companies.

Unscrupulous practices. The one issue that comes up consistently is their apparent lack of action once they have begun to take your money. The job of a debt settlement company is to negotiate a settlement amount (lump sum) with your individual creditors so that they can be paid off in full. That activity needs to be on-going while you are building up cash in order to pay off the account balances. Be sure to get any offers in writing from the debt settlement company that they claim to have worked out with your creditors.

High fees. This type of debt relief comes with a price: high fees. These charges are collected up front because of the nature of the type of settlement that they offer. Once a creditor is paid off, you no longer need the debt settlement company, so in order to protect themselves, you will have to pay money up front for their services. These charges can be several hundred dollars.

Non-compliance by creditors. Some creditors refuse to work with debt settlement companies because of the questionable ways that they have in dealing with the creditors.

Escrowing funds. Debt settlement companies take your money to pay your creditors and escrow it (put it into their own account) in order to pay the debts off to your creditors. That is all well and good, but when do those payments take place? Once an agreed settlement has been reached it should be right away, but sometimes is not. Questions have arisen as to the ethical practices of allowing that money to sit in the coffers of the debt settlement company as long as possible in order to earn interest before it is paid out.

Asking for more. Debt settlement companies are notorious for asking for more money from debtors. Fees and charges should be known up front and should be clearly spelled out in a signed agreement. This is the only way to combat this type of activity.

If you choose the debt settlement method of dealing with your debts over credit counseling or debt management plans, then be sure to do your homework and check the backgrounds of the companies for which you are considering. A little research can save you a lot of headaches and a lot of money. It is worth the effort.