Debt settlement companies: your best friend or worst foe?

admin • September 30, 2013

Given the current condition of our economy, financial debt has become a pitfall for many consumers. These conditions have brought forth many consumers. These conditions have brought forth many who claim to be offering a helping hand to such consumers, a way out of their tangled web of financial despair. Just as there are legitimate resources available to consumers, there are just as many, if not more, deceptive practices that will only drive you deeper into financial distress. I’m sure we’ve all seen and heard the countless commercials for debt settlement companies that promise to “settle your debts for pennies on the dollar.” But you really need to think about the statement. “Pennies on the dollar” could actually amount to 50 to 70 cents on the dollar. Put it that way, it doesn’t sound quite as appealing, does it?

Let us dig a little deeper into this phenomena. Did you know that any debt that a debt settlement company settles which exceeds $600 will need to be claimed by the consumer as an income to the Internal Revenue Service? So, if a consumer settles $100,000 in debts, $50,000 of that must be claimed as income with the IRS. In addition, the debt settlement company must receive a fee for their service, which is a percentage of the total debt and is often deducted prior to the actual creditors. So let’s put this all together: if you are paying the debt settlement company a percentage of your debt, paying creditor, and having an additional portion of funds claimed as income by the IRS, how much money are you really saving?

In the past three years I’ve encountered countless consumers who have fallen victim to some of more unscrupulous settlement companies, making monthly payments to them for over a year while no payments were being made to the actual creditors- which in many cases caused the accounts to be referred to collections, thus inflicting even more damage to the creditor’s history.

Furthermore, a debt settlement company cannot prevent a creditor from sending an account to collections or even pursing legal actions against a consumer during the settlement process if they are not being paid.

While there surely are legitimate debt settlement companies that do indeed help consumers escape their financial dilemma, many of them are under government and local state agency investigation for illegitimate practices, so know what to look for and what to avoid.
Most importantly, ask questions. Get all the facts before you sign on the dotted line.

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