Debt settlement companies claim that they can negotiate with your creditors and settle your debt for less than you currently owe. Unfortunately, many of these companies have made promises they can't keep, bringing the debt settlement industry under the scrutiny of law enforcement and government agencies. To protect yourself, thoroughly check out any debt settlement company, as well as alternatives to professional debt settlement, before working with them.
Debt Settlement Companies
Debt settlement companies operate by offering your creditors a one-time, lump-sum payment that is less than what you currently owe in return for the cancellation of the debt's balance. If you don't have cash available at the beginning of your debt settlement program, the settlement company may ask you to stop paying your debts entirely, putting the money that you would normally spend on payments into an escrow account. Once you've accumulated enough cash, the debt settlement company contacts your creditors and goes to work on negotiating a reduction of your debt.
Transparency About Fees
Federal rules, enforced by the Federal Trade Commission, prohibit most debt settlement companies from charging you any fees until they have actually settled a debt for you. Some debt settlement companies try to get around this rule by selling you a debt education class or other material before they let you begin the debt settlement process. However, debt education is available for free and at low cost through many non-profit credit counseling agencies. If a debt settlement company wants to sell you something before doing its job, avoid the company.
Location and Licensing
In order to avoid regulation, some debt settlement companies may operate from outside the country. Be sure to verify the physical address of any debt settlement company that you work with. You should also determine whether the company is licensed or registered to operate in your state. Contact the Better Business Bureau to find out whether the company has a history of complaints.
Credit Consequences
Because debt settlement companies ask you to stop paying your bills while you save up your money for a settlement, your credit is going to suffer. Even worse, the added interest and fees add up, rendering insignificant whatever "discount" the debt settlement company can get for you. Debt settlement firms are required by the FTC rules to tell you how long it is going to take for them to complete your case and to let you know about the consequences of late payments for your credit. They should also inform you that if your creditors get impatient, they may not agree to a debt settlement, or wait for one to be offered, but instead take you to court. If you are sued, the debt settlement firm is not going to be much help.
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