Want to settle your debts? - What you need to know!

Why has all this attention been on the debt settlement business? Well, outstanding credit card debt is a major problem in our country. Revolving credit now stands at 945 Billion Dollars and that figure is mostly comprised of credit card charges. Unfortunately as credit card lenders enact new fees and raise interest rates consumers are becoming hard-pressed to find solutions to relieve the pressure on their monthly budget. Although the benefits of debt settlement are debatable at best, it should come as no surprise then that many consumers choose this option when they feel they have nowhere else to turn.

As you know desperate people don’t always make good choices and there are plenty of companies out there looking to take advantage of consumers when they’re most vulnerable. That’s why more and more states are taking a hard look at the debt settlement business these days.

The growth of the debt settlement industry is also due to advertising campaigns that guarantee amazing results. You’ve probably seen the ads that promise to save 50, 60 even 70 percent of your overall debt all while improving your credit. Interestingly enough it is these types of exaggerated claims that may lead to the downfall of debt settlement. Until recently state regulators didn’t have the time, resources or commitment to stop these kinds of deceptive ads and it began to dominate the airwaves. Unfortunately perception is reality for many people and the sad reality for many consumers has been at the promises made in debt settlement ads have been too good to resist.
 
A basic problem inherent in debt settlement is the approach used to secure the settlement itself. Debt settlement companies evaluate the indebtedness of an individual and establish a monthly payment amount based on their findings. These monthly payments are made directly to the debt settlement company and are retain in an escrow account. Contrary to many clients understanding these funds are not immediately sent to creditors. This actually makes sense because many creditors would be unwilling to settle a debt unless they were confident there were funds available to satisfy the payoff amount. However, while the settlement firm accumulates cash creditors go unpaid, meanwhile interest in late fees accrue, your debt increases and collection calls continue. Even more alarming is your exposure to lawsuits brought by your unpaid creditors.

The New York attorney general has advised an enrollment in a debt settlement plan premised on stopping payments to creditors, will likely lead to more frequent and aggressive collection efforts; often resulting in judgments, wage garnishments and the freezing of bank accounts.
Although the ads may claim otherwise, the debt settlement process can have a devastating effect on your credit score. According to a representative at a company, consumers in debt settlement plans often see their credit score plummet. Why? Your payment history accounts for 35% of your score, if the debt settlement company withholds payments for several months while they build up the lump sum and hope the creditors would give in you score would suffer the consequences month after month. What’s worst, settling a debt for less than the amount owed results in a seriously negative mark on your credit score, a notation that will remain visible to other lenders for seven years.
The practice that made settlement firms appear on the radar of state regulators had to do with the fees they charge. Debt settlement companies often charge an upfront fee of 10% to 15 percent of the total amount owed. They may also charge monthly fees of about $50 and a backend fee of 20 to 30 percent of the amount saved for clients in a settlement.

Your initial fee alone for these services might be several thousand dollars and in the unlikely event that such a service help you settle your debt, you can stand to pay tens of thousands more in fees and tax penalties. I’d say unlikely because the industry has a success rate of 2%.

If you are having difficulties paying your credit cards or other unsecured debt, your first call should be to your creditor to see if you can work out a repayment plan with them. If you are unsuccessful your very next call should be to an accredited counseling service to examine a full range of options appropriate for your specific situation.