Several people have contacted us recently with questions about companies that offer debt-relief or debt-settlement.  Apparently, many people are wondering about this; in fact, the Wall Street Journal recently ran an article focusing on the increasing number of consumer compaints about debt-settlement companies this year.

When consumers are feeling the pinch of higher costs, stagnant wages and economic uncertainty, they tend to explore all possible options to save money.   The slick advertisements promising “paying your bills for pennies on the dollar” can be very enticing.  Keep in mind that most of these companies are For Profit, out to increase their sales as part of their corporate goals.  Here are some things to consider:

1) You can do for yourself many of the same things these companies want to charge you money for.  Contact your own credit card companies to find out about lower interest rates and fee reversal, as well as any hardship or debt management programs they might have for their customers. 
NOTE: Our clients receive word-for-word  strategies to help them contact their credit accounts and reduce interest rates.   This is included in your Credit Analysis.

2) Many creditors will not work with debt-settlement companies.   Don’t assume that all of your accounts will be effectively included in the program if you do sign up.  

3) Many of these companies charge high fees such as 10% to 15% of the total amount owed upfront, plus a monthly fee and sometimes even a back-end fee of 20-30% of the amount “saved” in the customer’s settlement.  This is all on top of the monthly payment needed for them to pay your bills.

4) Customers are often instructed to stop paying their bills at the beginning of the debt-settlement process, but it may take several weeks for it to actually start.  This can lead to significant late fees being added to the account balance by the original creditor, actually increasing the amount the customer owes. 
RECOMMENDATION: Consider continued payment of your own bills until you have written confirmation that the settlement plan has been accepted by each of your creditors.

5) Most of these debt-managment (DM) plans are structured so that the consumer sends one monthly payment to the DM company and they are supposed to disburse it to pay all of the customer’s bills each month.  However, not all disbursements are made according to the actual due date on the bill, but are often sent out once a month on the DM company’s schedule.  This can result in the original creditor reporting a 30 day late payment on the customer’s credit report.  Because the first payment may have been delayed, all subsequent payments are then noted as late; this can add up to dozens, even hundreds of late payments on the consumer’s credit report.
RECOMMENDATION: Ask the DM company up front what the bill paying schedule will be.  Request in writing that all of your bills be paid by the monthly due date. 

6) When the DM company gets the consumer’s creditors to agree to the settlement plan, they often include closing the account as part of the agreement.  This can have a detrimental impact on the consumer’s credit history, which is the third largest factor in the credit score.  Some of these accounts may have been in good standing for years and once they are closed, the good credit history goes with them an out of your score.

7) There are some lending and financial companies that will not consider loan approval to someone in a debt-management program.  Even after several years of positive, consistent participation, some companies view this as a red flag.   If you are already in a DM program and considering any kind of loan, ask the lender what their guidelines are regarding DM programs before applying and before they pull your credit.

As you can see, there are many things to consider before signing up for a debt-settlement program.  Now, there are some legitimate credit counseling organizations that have been beneficial to some consumers.  You can search for an accredited agency through the National Foundation for Credit Counseling.  Be sure to check with your local Better Business Bureau to be sure the agency is a legitimate business in good standing.

Be informed, be proactive and look at ALL of your options before signing up for any debt-relief programs.