The Risks of Using Debt Settlement Companies

While people across the country continue to watch their bills pile up and face mounting credit card debt, some have recently been looking for a new approach to resolve their financial troubles. Sensing people's concern -- and, at times, desperation -- a new industry of "debt settlement companies" has arisen, claiming to be the answer for which many people have been searching. Unfortunately, this primarily unregulated business often takes advantage of the very people it claims to help, leaving people with larger debts than they had originally.

Debt settlement companies often make pitches that seem unbelievable -- claiming they will decrease a person's debt by 50 percent if they use their services. Despite these claims, very few debt settlement companies appear to follow through with these promises.

As the number of settlement companies has increased in recent years, a corresponding rise in the number of consumer complaints has been noted. Across the country, there were four times more complaints in 2007 than 2006, according to the Federal Trade Commission. In Florida alone, complaints against debt settlement companies have tripled in the past year.

Debt Settlement vs. Bankruptcy

In most situations, filing for Chapter 7 bankruptcy is a better alternative to using a debt settlement company.

To begin with, using a debt settlement company can be extremely pricey. Typically, these companies' fees amount to between 14 and 18 percent of the total amount of the debt. On top of the obvious charges, many debt settlement companies instruct individuals to stop paying their creditors, while instead putting money into a separate account each month. If the company is unable to reach a settlement, the debt will be much larger than at the start, as interest and penalty fees will typically have been applied.

In addition, settlement companies' reputations precede them, and many credit card companies now refuse to do business with them. Nevertheless, the settlement companies will often continue to accept payments from the debtor, rather than disclosing this roadblock. In the worst-case scenarios, the settlement companies are frauds and make off with the money paid into the separate accounts.

Most people who reach a settlement will also be responsible for paying taxes on the difference between the original debt and the settlement amount.

After a settlement has been reached, the debtor's credit score will read, "Paid by settlement." While the individual may not be responsible for the payment any longer, his or her credit score is damaged.

The New York attorney general summarized the problem as such, "Millions of hardworking Americans are finding themselves imprisoned by debt. In response, a rogue industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation."

Conversely, filing for Chapter 7 bankruptcy will eliminate the individual's debt, for a fraction of the cost. After a debtor has filed for Chapter 7 bankruptcy, he or she can start to rebuild credit right away.

If you are considering using a debt settlement company to decrease your debt, it is best to review your case with a skilled bankruptcy attorney. A Florida bankruptcy lawyer will be able to assess your financial situation and advise you regarding the best course of action to protect your economic future.

Article provided by Fisher & Frommer
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