There has been a new set of warnings issued by consumer groups concerning debt settlement companies. Debt settlement companies offer to help consumers gain control of their debts for a fee. But not all debt settlement companies are equal, and that is why some consumers actually find themselves deeper in debt after paying the fees.
The consumer alerts were issued by Consumer Federation of America, the National Consumer Law Center, Consumer Action, and Consumers Union. Some debt settlement companies are actually operating more like scams then as legitimate offerings. Some of these businesses are only interested in collecting the fees and do not really have any intention of making a sincere effort to work with the consumer’s creditors.
The offers these debt settlement companies make to consumers sound appealing when debt collectors are hounding a household. A disreputable settlement business tells the consumer to make payments to a single account each month instead of to creditors. The money is allowed to accumulate in the account until there is enough to approach a creditor and offer a lump sum payment which in theory could be pennies on the dollar. But coming out of the account are fees paid to the settlement company.
The reality of this process is that consumers are often unable to pay enough into the account to reach a point of being able to make a settlement offer within a reasonable amount of time. The fees being deducted are high also. They can amount to as much as 20% of the debt amount owed. The settlement company determines the total fee up front and collects it within the first six months.
The sales pitch usually fails to explain all the details of the contract. Consumers desperate to stop collection efforts will sometimes agree to anything that promises relief. What they don’t understand is the debt settlement companies cannot stop collection efforts by the owners of consumer accounts.
Making matters even worse is the fact the consumers are placing money that would have been paid on accounts into the debt settlement bank account. In the meantime the interest and penalties continue to accumulate on the accounts. Many consumers start the debt settlement program, pay for up to 6 months, and then drop out. In the meantime the account balances have been growing. After paying the exorbitant fees to the settlement company, the consumer can end up owing even more to debtors.
Like most scams or scam-type offerings the initial proposal sounds helpful and desperate people grasp at offers of help. The debt settlement companies make sure they get their fees first meaning they get fully paid for work they did not due when people drop out of the program in less than half a year. They make no promises about debt to actually be settled either.
The Federal Trade Commission wants to implement rules that will stop debt settlement companies from charging fees before any debts are settled. More detailed information would have to be provided to the consumer as to the services included, how long it will realistically take to settle debts based on the payments to the savings account, and the fact that not everyone will be able to settle their debts.
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