It’s no secret debt settlement companies have plagued a significant volume of financially strapped consumers over the past few years. It doesn’t help that television, radio, and internet sites continually run advertisements from unscrupulous, fly by night companies that lead to the perception that settling on debts can be a safe and foolproof route to securing financial stability.
Typically these companies have a shelf life of 2 years before the mass proliferation of angry and ripped off customers irreversibly tarnish the internet credibility and Better Business Bureau profiles of firms. These companies, more often than not, operate from PO Boxes and close without notice, taking unapplied funds from consumers with them. They can be very convincing, providing hope in saying “yes” to what you can afford when everyone – from the creditors you already have to the lenders you ask to repackage or consolidate your debt – has shrugged unwilling to help…explaining that math is math, it is what it is, and unfortunately, you are in over your head.
Recently, a person that I was working with brought in paperwork that a debt settlement company sent to her in hopes she would start a program with them and in turn, stop paying her creditors monthly. As always, when I get paperwork like this, I find the disclaimer section and walk through it line by line to deconstruct the disconnect between what the telesales rep sold her and what the fine print says. Here are a few of the disclaimers:
Disclaimer #1: “Client Understands this AGREEMENT is not a ‘debt consolidation’ or ‘debt management plan’ agreement and the Company will not disperse monthly payments to any client creditor accounts.”
Often times, debt settlement companies paint a verbal illusion that despite not providing the original creditors with payments sufficient to expectations, they are on the same page with the creditors. Here they are highlighting that this is not the case. They clearly outline that this not a plan like a DMP (Debt Management Plan), which provides beneficial changes in terms in exchange for payments being dispersed to the creditor on a monthly basis. Nor is it a consolidation where this company is paying off your debt in exchange for you making payments directly to them. Instead, you will be paying payments to the settlement company despite them not holding the debt itself.
Disclaimer #2: “Your payments will be used first for fees due to the company, then held and dispersed for settlement to creditors. Typically, we will wait until you have accumulated 20% to 30% of a particular debt before we will make a creditor a settlement offer. Delinquent accounts may continue to accrue interest and late charges until accounts are settled. Client understands creditor may impose other penalties as a result of missed payments, including but not limited to: the reporting of adverse info to credit bureaus, filing of lawsuit to collect debts if the creditor is unwilling to accept a settlement offer, or the client is unable to propose a settlement offer to the creditor.”
Previously in the contract it was outlined how the fee would work. It was listed to be 30% of what the client’s projected savings amount would be vs. the final balances also known as the “charge off” total. They estimated that for the $33,800 in debt the consumer had, they felt they could settle for $22,000.
BREAKING DOWN DEBT SETTLEMENTS
The problem with using these numbers at face value is that the customer will owe tremendously more money on the debt in 6 months when creditors will have “charged off” the accounts after an expensive process of adding in missed payments, late and over the limit fees and default increases on interest rates.
Understanding the process, it is likely that the settlement company would continue to stick to the idea that they could still settle on the debt for the originally quoted $22,000 since the 30 cents on the dollar on the increased figure after paying the larger fee is still a somewhat realistic low end quote for older unpaid debt. They would view this as an easy sell to the consumer since they are already one foot in the door, the debts have irreversibly gone to default, the amount they are being told will take to settle is remaining the same – and now their “savings” are even greater.
While the fee based on perceived savings would now increase from $3540 to $7596, the far more significant thing to consider is the time that fee will take, with a $425 quoted payment, to pay that fee in full before the first dollar will be put aside to settle any debts. With the initial quote using the pre default balances, the fee would be paid and some money would be put aside for debts with the 9th payment. Upon post charge-off review, the fee wouldn’t be paid in full until the 18th payment. The lowest credit item the client was considering including was $6000, which would balloon to around $8400 upon charge off and according to the 20-30% figure quote as needed before a settlement could be offered, another 4 full payments would need to be made. This means that the consumer would pay for almost two full years before expecting a single debt to be settled.
A few other items covered here is that your credit will be negatively affected by this and there is no guarantee that a creditor will even accept a settlement offer under any circumstance.
Disclaimer #3: “Company does not guarantee the cessation of phone calls or correspondence related to collections.”
Guarantee…really? As sure as the sun sets and rises, if you don’t pay your credit cards, you are going to be inundated with more phone calls and mail and then you care to imagine, much less consider comfortable. This is not a puck getting passed to the goalie here and there – it’s a flood gate that will invariably make you change to some degree how go through your day, not to mention the metaphysical reaction to the phone ringing or mailperson walking up your driveway.
Disclaimer #4: “Company does not advocate that you stop paying your creditors to force them into settlements. Furthermore, we do not encourage you to default on any contracts that you have with your creditors. When a payment to a creditor is missed or is late, there can be negative consequences to your credit score and potential lawsuits.”
This caveat is quite interesting as it really counters the concept of what debt settlement is and how it is offered. Creditors don’t consider settlements on debts if the consumer is current on payments, imploring the classic no blood, no band-aid ideology. The television ads that first normalized the practice for my client and the over the phone sales pitch that further fueled her consideration were based on the notion that she was actually foolish or naïve to continue paying her debts as agreed. Continuing to do so, it was argued, would simply be one more month wasted away on the hamster wheel of financial chaos and one more month before this profound sense of fiscal liberation would take root.
So why on the front end would a debt settlement company push an angle so aggressively on both an individual and general level that they then distance themselves from in their paperwork? It’s because debt settlement is actually intended to be an alternative to bankruptcy and not an alternative to paying debts as you are able and contractually obligated to do so.
Debt settlement companies can logically provide an argument as to why they exist in the first place by simply referencing similarities to bankruptcy attorneys. In theory, both entities help facilitate options for consumers who have fallen past due on debts and are not able to immediately make up all of the missed payments or pay the balance in full. Debt settlement companies in fact argue that they provide a better service to society in that their patrons pay back portions of debt (in successful cases) when compared to those who file for Chapter 7 bankruptcy and leave the creditors with the proverbial bag. The fees are also justified since it is a regular practice to pay an attorney and technically a 3rd party entity, a fee to assist with debt elimination or restructuring in the bankruptcy process.
Furthermore, debt settlement is an automatic as far as being a regularly discussed option for collection debt. Even a reputable consumer credit counselor, myself included, may recommend self-administered, non 3rd party involved settlement if a debt has already moved to collection status. This means it is no longer open and fruitfully contributing to credit worthiness; it’s moved to an outside collection agency and reinstatement with the creditor is not possible… and once tax and credit repercussions are understood after discussing with appropriate referrals (ie tax professional). So, in terms of using settlement on previously unpaid debt, the practice itself does hold some degree of legitimacy…again if done on your own without the fees of a debt settlement company.
Debt settlement is an absolutely inappropriate, inefficient, unreliable and rather costly method for dealing with debt if the accounts are current and could continue to be paid as agreed. As the disclaimer boldly states, credit is destroyed with non payment. This latently, but directly, impacts your wallet in the form of increased insurance premiums, lack of employment advances (since credit is used to determine stability and character of potential candidates in the interview process) and the need to look towards subprime or underground credit options if emergency expenditures arise.
JUDGMENTS AND GARNISHMENTS AND BANKRUPTCY
In addressing the last tidbit, the possibility of lawsuits brought by creditors, it is important to understand that not all debts are equal. While an old cable bill may fall through the cracks and be forgotten over time, it is far from being realistic to assume that a $10,000 credit card balance held by an employed consumer will avoid aggressive involuntary collection actions long enough to get through a 3 to 5 year plan centered around not providing installment payments directly to the collector. If suit arises before the consumer has the funds to supply a sufficient settlement and the consumer is unable to weather the impact of garnishment, a likely outcome is succumbing to bankruptcy protection. And that may or may not continue to impose payments to creditors due to varying qualification standards of Chapter 7 (total liquidation).
Debt settlement is still targeted heavily to consumers with current accounts versus those plagued with collections destined for bankruptcy, as it targets a much wider population of potential customers. For instance, 1.37 million Americans filed for bankruptcy in 2011. Though that seems like a big number backed by a tough economic climate, it only translates into .46% of all Americans or one in 212. Ironically, 46% or 100 times more Americans carry revolving debt balances from month to month, with the average unsecured debt load per household barely under $16,000.
If you are looking for the best way to repay your debts or if you would like free and unbiased advice about debt settlements, contact LSS at 888.577.2227. We have counselors available to help you take action to improve your finances. You can also GET STARTED ONLINE now…It’s quick, easy, and just as effective as phone or in-person counseling.
Author Tim Fischer is a Certified Financial Counselor with LSS Financial Counseling. He specializes in Foreclosure Prevention Counseling.