Debt Settlement Companies: Too Good to be True?

Many patrons come to the law library and Civil Self-Help Center because they have been sued by a credit card company. A sizable percentage of these people tell us that there must be some mistake—they hired a company to settle all their debts for them, so how can they be sued?

Unfortunately, “debt settlement companies” frequently promise far more than they can deliver. These companies actually have no power to prevent lawsuits. They offer to negotiate settlements for consumers, often charging a hefty fee for the service, but they cannot force a creditor to accept their offer. The consumers often end up worse off than they would have been without the debt settlement company’s “help.”

Risky Business: Debt Settlement Companies Can Make Your Debts Worse

Here’s how it works: A consumer who is struggling to pay off her debts hires a debt settlement company to help her. The company typically advises her to stop making any payments on her debt at all, and put the money she saves each month into a special savings account—which the settlement company may control. When there is enough money in the savings account to make a reasonable settlement offer, the company will contact one of her creditors and try to settle the debt with a one-time payment. “Knee Deep in Debt,” Federal Trade Commission,  .

The creditor may accept this as payment in full, forgive the remaining debt, and close the account. However, it is not required to do so. If it chooses, it can refuse to negotiate at all, hold out for a bigger settlement offer, or sue the consumer—it’s the creditor’s option. In the mean time, the consumer’s debts (plus interest, late fees, and penalties) continue to rise, and her credit rating continues to sink, since she is no longer even making minimum monthly payments.

And that’s the best-case scenario. Some debt settlement companies are actually out-and-out scams, taking a fee from the consumer (or paying themselves first from the savings account), then never even contacting the creditors to make an offer. In 2010, the Government Accountability Office investigated industry practice and found that 17 out of 20 companies it sampled charged fees up-front. GAO also found that some companies provide “fraudulent, deceptive, or questionable information” to potential customers, such exceptionally high success rates, claiming a link to government programs, or guaranteeing success. “Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers,” Government Accountability Office Report, Apr. 22, 2010.

There Are Alternatives

Consumers who are facing overwhelming debts have several alternatives that are less risky (and less costly) than debt settlement companies. “Settling Your Credit Card Debts,” Federal Trade Commission. These include:

Talk with your credit card company yourself, even if you have been turned down before, to try to work out a realistic modified payment plan. Be persistent and keep detailed notes.

Work with a credit counselor. Credit counseling organizations can give you advice on money management and help you develop a plan to get out of debt. They are often non-profit, but they may charge a fee, so shop around. The National Foundation for Credit Counseling offers a useful website at http://www.nfcc.org/. It lists agencies and also contains a plethora of useful consumer information.

The credit counselor may suggest a “Debt Management Plan.” These plans are similar to the services offered by debt settlement companies – you may be required to deposit money monthly with the credit counseling agency, which then arranges a payment plan for you with your creditors. This is not a “get out of debt quick” plan; it may take several years to pay down the debts, during which you may have to agree not to use any credit at all. Legitimate plans will not require payment up front, guarantee any particular result, or claim to be part of a government program to bail out credit card debt.

Declare bankruptcy. Bankruptcy may free you from all unsecured debt, giving you a “fresh start.” It has serious effects on your credit score, and should be used only if necessary, but in some cases it makes sense. You will be required to consult a credit counselor before you can file for bankruptcy; the counselor will go over your options with you. The federal government maintains a list of approved organizations, organized by state .

Bottom line: there is no quick, painless fix to credit card debt. These options may not sound as enticing as a debt settlement company’s claims, but they are far more reliable, and probably far less expensive. Choose wisely!

For more information on this and other “Everyday Law” subjects, visit the Sacramento County Public Law Library, “Providing Free Public Access to Legal Information for over 100 years.”

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jws
Avatar of jws
April 2, 2012 | 7:03 PM

Yes they are a scam.

April 5, 2012 | 8:39 AM

What really bothers me about credit card debt lawsuits is the outrageous fees the creditors (often debt collectors who have bought the debt for pennies on the dollar) heap upon the existing debt. The people that incur this debt are down on their luck, often due to unemployment, disability, illness or divorce. They stopped paying the credit card bills probably hoping to catch up later and then they get hit with a lawsuit for ten times the amount they owe.
The debt collectors know that most of these people do not have the resources to hire a lawyer or the time/iniative to fight a lawsuit. The debtor fails to show up in court due to embarressment and fear of the whole situation and the collector wins by default granting them the right to garnish wages, seize assets, etc. to pay the amount in full.
I want these people to know that they can and should fight the lawsuit in court. Showing up or fighting the lawsuit does not mean they are trying to get out of their debt. But it does mean that the creditor needs to prove the debt is valid, that they own it and that the amount they are suing for is correct, and in many many cases they cannot prove this.
http://www.HowToAnswerACreditCardDebtLawsuit.com

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