It comes as no surprise that consumer complaints regarding the debt settlement industry have spiked in recent years. Hundreds of new companies offering debt relief have sprouted up, seemingly overnight, to provide services to the millions of Americans who are struggling with debt. Many consumers, desperate to eliminate debt, jump at any opportunity to finally get their finances back on track. Unfortunately in an industry that is largely unregulated, consumers rarely see the promised results.

In response to growing consumer complaints, the Maryland General Assembly is considering a bill which would regulate debt settlement companies and increase consumer protection. The bill being considered would require debt settlement companies to stop making claims regarding how much money consumers will save, disclose the limitations of the services and regulate the amount of fees that can be charged for services. Maryland is not the first state to consider regulating debt settlement companies. As more and more people fall victim to unscrupulous debt settlement companies, the number of states proposing regulations will surely increase.

Fortunately consumers do not have to wait until regulations are in place to avoid being taken for a ride by a debt settlement company. Consider the following tips before moving forward with a debt relief program.

  • Determine if debt settlement is right for you- Despite the growing number of companies offering this service, debt settlement is simply not the right answer for everyone. Debt settlement is the last resort before filing for bankruptcy. It is not designed to help you lower your interest rate or get out of paying a debt you are able to repay per the terms of your contract. There are no guarantees that the process will be successful and the risks are many.
  • Understand the process- How do debt settlement companies cut your debt in half? The concept is actually quite simple and one that has been used long before the latest recession. Creditors who fear they will not be able to collect any payment on debt owed are often willing to negotiate a reduced payment in an attempt to recoup some of their cash. They only do this if your account is delinquent. Understand that your credit card companies will not be receiving monthly payments throughout the process, which will have a negative impact on your credit. Debt settlement companies collect a monthly payment which should be placed in a third party escrow account for use when settlements have been negotiated. Many people confuse debt settlement with other forms of debt relief where regular payments are made to the creditor each month. This can be a costly misunderstanding.
  • Check out the payment structure- A large portion of debt settlement companies collect their fee up front. This causes problems on two fronts. First, having paid themselves prior to actually negotiating any accounts, the company has no real incentive to work hard on your behalf. Second and perhaps more damaging is the fact that it will take you longer to save money for settlements if you have to pay a few thousand up front to the settlement company. There is a window of opportunity where creditors will negotiate and if you are unable to accept an offered settlement because you lack the funds, you might find yourself facing legal consequences.

These are just a few of the things you should think about before considering debt settlement as a means to eliminate debt. Take the time to research any company offering services to determine if they legitimate, before signing on the dotted line. For some people, debt settlement is the best option to avoid bankruptcy. By knowing what you are getting into beforehand, you can make an informed decision regarding your personal finances.

Lastly, it is important that you stay organized with your bills and stay on top of your financial game with active wealth management to avoid debt.