Why Not To Hire Companies That Help With Debt

by Neal Frankle, CFP ®

You can solve your debt problems many different ways. Some people think about turning to companies that supposedly” help with debt” and engage their services.  Are they worth it? Not usually. Even if you are in serious debt you probably don’t need to use them.  In fact, they might even make your situation more difficult. Debt scams are everywhere you look. If you want to improve your credit score, going this route will probably make your life more difficult.

Important Note – Rather than go down this expensive and futile road, why not simple refinance your debt at a much lower cost?  If you have high cost debt, check out peer-to-peer lending.  You might be able to slash your costs, keep your credit score intact and save a ton of money and time.

Before we get started, it’s important for you to understand that your creditors want to work with you. They understand that if you are in serious trouble and choose bankruptcy, there is a high likelihood they won’t collect a thing.

So if you can come up with even a small portion of what you owe and have a good solid debt payment plan, many creditors will forgive at least some of what you owe or at least work with you on payments. Once you get square with your creditors, they’ll report the debt settled to the credit bureaus and your credit score won’t continue to be attacked. But remember that even if the balance is zero, if you had payment problems, that negative history will stay on your record and nobody can do anything about that regardless of what they promise you.

As you might imagine, creditors don’t advertise that they’re open to negotiating debt settlement. That’s why you might be tempted to hire one of these debt settlement firms.  But I suggest you reconsider.  Here’s why:

1. Costs

Most of the companies that provide these services don’t explain their charges. Many charge about 20% of your  debt and you must pay this upfront.  On top of that, they charge you set up fees and monthly charges.

If you sign up for one of these services you’ll have to pay for them first as I said. That means you may have to save for a long time to pay them off before you start paying off the settled debt. If you have expensive consumer debt, look into credit card alternatives rather than debt settlement.

Before you sign up for one of these services, make sure you understand exactly how they charge and what the total fee is. But that’s easier said than done. Many of the shady firms keep this number from you. If that’s the case, simply walk. Never do business with people who aren’t upfront about the costs, no matter what they promise.

Finally, compare your options. Let’s say the company wants $4,000 for their services. Talk to an attorney too. That $4,000 can buy a lot of time and might be better spent with a sharp lawyer.

2. Services

Get a time frame for when they’ll complete their work. Often, they contact the companies and get the debt frozen but don’t actually do anything to negotiate the debt. The only thing they actually do is withdraw money to pay themselves.

3. Make Matters Worse

People hire debt settlement companies because they don’t want to get those pesky collection calls. Understandable.

But sometimes when the creditors find out you’re working with a debt settlement company to discharge debt, they turn up the heat rather than turn down the gas. They might send the debt to a collection agency quicker or take you to court. Oh…and by the way…as soon as the creditor takes you to court, the debt settlement company drops your case because they aren’t attorneys and can’t represent you or provide legal advice. Say goodbye to the money you spent with them. This is another reason why you might prefer to speak with an attorney from the get-go.

3. Dropouts

Many of these companies simply work the numbers. They know that a high percentage of the people who sign up for their services will get tired of paying those monthly fees and simply give up. Of course, when they do, the debt settlement company keeps all the fees they already collected. They don’t believe in refunds. And you are left out in the cold. Brrrrrr.

In summary, companies that say that can help you with your debt problem are expensive, they rarely provide any real value and they can actually make your situation far worse than it is now.  Rather than go this route, consider speaking to an attorney who specializes in debt or contact your creditors directly.

Have you ever used a debt settlement company?  What was your experience?

 

 

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