You have no doubt seen advertisements for “debt settlement” or “debt relief” companies on YouTube, Twitter, Facebook, or online.  Any search for any issues relating to debt seem to trigger continuous ads for these kinds of services.  Their ads are well-produced and brimming with hope.  Unfortunately, in the experience of hundreds of my past and present clients, all these companies sell is hope itself–not actual relief–for a very high price.

What these companies claim is that they will help the client get out of debt by settling the client’s debts for “pennies on the dollar.”  The client just needs to pay a monthly payment to them, which they say they will save up in a client trust account, and use to settle the client’s debts.  At the end of the plan, the client would be debt free and would theoretically have saved thousands of dollars from what they would have had to pay to pay the debts off in full directly.  These companies promise hope and relief and a bright future.

The reality is far different.  There are a number of problems and hidden pitfalls with these companies.  The first problem is the cost: I have reviewed a number of these companies’ contracts.  One of these companies states that their goal is to settle the debt for 75% of the balance, saving the client 25%.  The company’s fees for settling the client’s debts is 25% of the balance of the client’s total debts in the program.  The settlement amounts plus the fees can add up to 100% of the total debt owed.

The second problem is what a debt settlement scheme does to your credit: These companies tell the client that they have to stop paying their debts in order to settle them.  This very quickly tanks the client’s credit, and in many cases the client’s credit score will drop to the 400s, which is even below what bankruptcy will do to a person’s credit score.  The client’s credit score will stay there until the debt is resolved, or the client gives up and files bankruptcy.

The third problem is how these companies structure their fees: The fine print buried in the contract provides that once the company has settled *a* debt, then they get to pay themselves their full fee of 25% of the balance of the debts.  These companies will cherry pick the smallest debt, settle it, and then pay themselves their full fee, before ever settling another debt.  To give you an example, let’s say a client has $20,000 in debt, with the smallest debt being $1000 to a credit card, and the client pays $400 per month to the debt settlement company.  In this example, the debt settlement company would use the first 2 months of payments to settle the $1,000 credit card.  The company then would take the next $5,000 the client pays in to the settlement scheme, and stuffs it in their own pockets as their fees.  This is over 1 year of the client’s payments that are going right to the debt settlement company.  During this next 1 year, the client’s other creditors are going to get more and more fed up and may eventually sue the client.

The fourth problem is that some credit card companies, notably Discover and American Express, do not work with debt settlement companies.  But the debt settlement companies largely fail to inform their clients of this.  The clients usually find out that Discover and American Express sue them after several months with (and thousands of dollars paid to) the debt settlement company.  Despite promises to help with lawsuits, most of the time the debt settlement companies fail to help, and the client gets a judgment which can lead to garnishments and bank levies.

The fifth problem is that the debt settlement companies hide things from the client: When a client signs up with the debt settlement companies, the client signs a limited power of attorney, which tells the client’s creditors to send bills, collections letters, and pre-lawsuit information to the debt settlement company instead of the client.  This makes the client think everything is going well and their debts are being handled.  But often this just hides the problem.  The client’s creditors, especially Discover and American Express, may be moving ahead with lawsuits, and the client’s credit score is dropping precipitously, but the client doesn’t find out until it is too late by getting a summons and complaint.

I’ve met with hundreds of clients who tried and were failed by debt settlement and debt relief companies.  They have collectively lost hundreds of thousands of dollars in fees and payments.  Some of these companies have even been sued and closed by the Minnesota Attorney General’s Office due to fraudulent practices.

Fortunately, bankruptcy is a legitimate, proven, faster, and far more affordable way to permanently eliminate debts and get a fresh financial start.  If you are struggling with debt and are considering a debt settlement program, please do your research and contact us for a free consultation to review your situation and discuss your options.