Debt settlement is not a scam. Far from it. Settling with creditors is a great way to deal with debt when you are unable to maintain consistent payments. It is however, not a cake walk, though many debt settlement companies will sell it as such. This post was inspired by a consult I did this morning with a gentleman in Pennsylvania looking at settlement as an approach for dealing with his unmanageable credit card debt. He wondered onto our website after having already consulted with a debt settlement company.
His unsecured debt totaled $22,000.00 spread out over 7 credit cards. His minimum payments are just over $900.00 a month. His interest rates on most of the accounts are over 20%. That is what’s killing him. He would be able to meet minimums, but for the higher interest, and likely be very successful using an aggressive debt rollup, or debt snowball strategy, to get out of debt quickly and unscathed.
His plight, when outlined to creditors, has thus far resulted in his feeling like he is hitting his head against a wall.
Talking to a debt settlement company affiliate sales rep.
The company he consulted with prior to me outlined a 36 month program where he could pay into an account roughly $300.00 for 36 months and poof, his debt is gone. Never mind that $3300 of that money set aside over that time will go to the settlement companies fees, I’ll get to that in a moment.
The sales person with whom he consulted is selling rainbows and unicorns for a commission. The 36 month plan for his situation is ridiculous for some of the following reasons.
Two of the accounts we discussed have balances of about $1000.00 and another one for $1500.00. Enrolling these accounts in a plan like this, unless they are the first ones settled (even then not advisable, unless left with no choice) is futile and silly. The math doesn’t work.
Optimum balance reduction through settlement only happens when you are delinquent, often very delinquent (5 months or more). When you stop paying, default interest rates of 29-32% will be applied, late payments will be assessed, all of which could result, in some cases, in over limit fees being tacked on. Depending on when settlement is reached the amount of the debt could now be double. Can the debt be settled? Absolutely, but using 50% savings as an example, what did you actually save? Nothing, or close enough to nothing to prove that the math doesn’t work.
What if we take these 3 smaller accounts out of the equation? We are now working on $18,000. By aggressively saving and setting aside every penny, this family could be out of debt in less than 12 months and limit the risk of being sued on unpaid credit card debt.
Now, I was completely upfront with this consumer about the way I saw his situation and perhaps he appreciates the candor and becomes a member. Perhaps the other consult he had sounded more appealing, with its 36 months, low (too low) payment to his savings for settlement and easier sounding approach. He will pay the typical fee in this industry, which by their very nature is harmful to the settlement process. The sales person will make his commission (some cases I have seen, commissions are in excess of 70% of client fee) for selling rainbows and unicorns.
Debt settlement can appear scam like.
He may ultimately be out of debt in 36 months, but it will have been a very long 36 months, and he will have paid too much, experienced too much grief, may be sued on one or more accounts and may miss out on strategies that could have been beneficial to recover his credit standing much faster (this is whole different topic for another post).
Moral to this post: Don’t buy into rainbows and unicorns unless you are into paying a salesman’s bills when you can’t afford your own. The settlement companies front line is, for the most part, populated by sales people motivated by commissions. Rarely do you find a place where you can consult with, and talk to an experienced debt specialist on first contact, prior to forking over any fees and whose motivation is your success, not your money.
If you have hit the debt wall and want to learn about all of your debt management options, including debt settlement, visit our free online debt relief system and research your options for free.
You are welcome to post in the comment below for feedback about whether debt settlement is right for you, or about anything you feel is a scam.