A debt settlement plan is a mostly ineffective solution to dealing with high interest debt. Debt settlement plans are administered by for-profit debt settlement companies that routinely violate federal laws regarding deceptive trade practices. While action by the Federal Trade Commission is still pending, many states’ Attorneys General have filed multiple lawsuits at some of the largest debt settlement providers.
Debt Settlement Promises
Debt settlement companies promise to be able to negotiate lower payoffs on credit card and other debts. They claim they have special relationships with creditors that allow for settlements of 50% or less of their debts.
These companies propose that instead of continuing to pay your creditors, that you send payments to them directly. The idea is appealing, since the payment they propose is much lower than normal minimum payments and is even lower than what credit counseling organizations can generally provide.
Debt settlement companies charge very high fees for these plans. The most common debt settlement plans charge upfront costs of 15% of the total debt. Clients under this pay structure make payments for 6-8 months just to pay the upfront fees. Most clients drop out never having settled a single debt, yet pay hundreds of dollars in upfront fees.
Other settlement companies charge a percentage of the “savings.” While this pay for performance approach is more desirable, it is based on the forgiven debt at the time of the settlement, not what the balance was when the client first enrolled. Clients in this situation can end up paying just as much or more than they originally owed since interest rates and fees continue to accrue until a settlement is completed.
Instead of completing settlements with their creditors, clients are likely to face escalating collection attempts, judgments, garnishments, liens and levies before they ever come close to completing their plan. The settlement companies, despite frequently having numerous lawyers on staff, do not represent a debtor in court. Only by retaining a lawyer can a debtor receive legal representation.
Debt settlement plans do not work. Whereas a debtor may have success negotiating a settlement directly with a single lender, hiring a debt settlement company to administer one of these plans can be a disaster.
Debtors are always better off if they complete credit counseling, receive legal advice or settle their own debt.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."