Beware of Scam Debt Settlement Companies

The crushing weight of debt you can’t afford to pay off can be unbearable. Anyone in this situation is desperate for help and likely to accept any offer that comes his way, even if the so-called help could do more harm than good. There are plenty of organizations offering debt relief, some even promising to eliminate most or all of what you owe. It sounds good; maybe a little too good. Some debt settlement companies deliver on their word, but it seems many more are just looking to rip you off. So how can you tell?

What is a Debt Settlement Company?

When you are in debt and can’t afford to pay off what you owe, you can hire a debt settlement company to work with your creditor and attempt to reduce the outstanding balance. Even though you can negotiate with a lender on your own, many people are either intimidated or just don’t know how to go about it and would rather pay someone else for help. You could ask a professional for debt settlement tips before ever signing up for the service to see if this is indeed the right course of action for you.

Signs You’re the Target of a Debt Settlement Scam

You should know that credit card companies and other lenders are under no obligation whatsoever to accept less than what you owe them. If a debt settlement company makes promises that undermine this fact, you should not employ their services.

1. Pennies on the Dollar: If you’re promised that you will only have to pay a small portion of what you owe, don’t believe it. Since creditors don’t have to reduce your outstanding balance, it’s impossible for a debt settlement company to guarantee they will.
2. Up-Front Fees: New legislation aimed at legitimizing the debt settlement industry requires for-profit debt companies to actually settle a debt before collecting fees. This law is meant to make it harder for scammers to thrive, so look out for anyone expecting a check before delivering results.
3. They Want Control of Your Payments: You should always maintain total control of 100 percent of your money. If a debt settlement company requires that you deposit funds into a special account in their name meant for holding future payments, or send payments directly to them, they don’t plan on actually sending it to your creditors. Your funds should only be held in a third party FDIC insured trust account.

Disadvantages of Debt Settlement

If you can get your debt down to a manageable level, that’s great. Note, however, that this accomplishment is not the end of your money troubles. You may find that you still owe quite a bit, but to different people for different reasons.

1. Fees: Debt settlement companies are not cheap. It’s quite possible that the amount they save you in debt will be canceled out by what they charge you for their services.
2. Taxes: The IRS considers the amount in debt you are forgiven to be income and will be taxed as such.
3. Credit: According to Credit.com, you can’t settle your debt until you stop making payments and let it go to collections. This is because creditors are much more likely to settle if they believe they really can’t get any money out of you. In the meantime, after months of missed payments, your credit rating will take a huge hit and prevent you from getting any new lines of credit or loans with affordable rates for many years.

How do you know if you should hire a debt settlement company? The founder of Consolidated Credit Counseling Services, Howard Dvorkin, states it quite frankly: “If you haven’t paid your bills in six months, don’t care about your credit rating, don’t care if you get sued or not, and have no plans to buy a home, that’s who’s a good candidate.” Basically, it should be your last resort before filing for bankruptcy. However, unlike bankruptcy, debt settlement offers you no legal protection.