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Reprint from Consumer Affairs

Desperate consumers enter into these agreements without fully understanding how they work.

Generally, debt relief or debt settlement companies offer a service to debt-burdened consumers to intervene with creditors–in most cases credit card companies–and secure a lower payoff amount. Often, desperate consumers enter into these agreements without fully understanding how they work (most end up throwing their hard earned money down the drain).

Credit card companies will eventually accept a lower amount than what you owe, but consumers must stop making payments on the credit card bill for an extended period of time.

debt settlement

Despite hiring the debt “relief” company the consumer faces the nightmare of calls, threats and lawsuits.

During that time, the consumer will face constant calls from debt collectors and his or her credit score will plunge. A charged off debt will show up on a consumer’s credit report for seven years.

A debt relief firm offers to be the broker between the credit card company and the consumer to negotiate a settlement. Only after it secures a settlement is it legally allowed to collect a fee from the consumer.

National Foundation of Consumer Credit Counselors “NFCC” is the only non-profit that has earned my seal of good faith.

Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC) says people struggling with debt should give serious consideration to non-profit credit counseling services for help as an alternative to debt settlement.

“These allegations are deeply troubling and call attention to the need for more consumer awareness about the dangers associated with some of the most misleading claims of the for-profit debt settlement companies,” McClary told ConsumerAffairs.

Banned debt settlement companies

Last year the Federal Trade Commission (FTC) banned hundreds of companies and individuals from the debt settlement business for repeatedly violating the law–in many cases collecting upfront fees. The agency advises debt burdened consumers to consider all options, including credit counseling and bankruptcy protection, before signing up with a debt settlement company.

As stated in the CFPB lawsuit, certain creditors have instituted policies not to negotiate with debt settlement companies. Consumers owing money to one of these creditors will therefore be required to negotiate directly with the creditor.

While a debt settlement firm may offer “coaching” and other services to these consumers, CFPB says these companies must inform customers that they may be required to negotiate any settlement on their own.

Warning:

Debt settlement may well leave you deeper in debt than you were when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and to collect the funds required for a settlement. This can have a negative effect on your credit score and may result in the creditor or debt collector filing a lawsuit while you are collecting settlement funds. And if you stop making payments on a credit card, late fees and interest will be added to the debt each month. If you exceed your credit limit, additional fees and charges may apply. This can cause your original debt to increase.


What are debt settlement/debt relief services and should I use them?

Debt Relief or Bankruptcy?

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Diane L. Drain

Diane L. Drain, bankruptcy attorney, retired law professor, mentor and community spokesperson.

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