With unemployment at high levels and the economy still sputtering, more people are having trouble paying their bills. Sensing an opportunity, there has recently been an explosion of “debt settlement companies,” which claim to be the solution to people’s financial troubles. However, the reality is that such companies operate in an unregulated environment and can take advantage of the very people that they purport to help.
The companies often claim that they can settle debts for 50 cents on the dollar. Unfortunately, many of these companies do not follow through on their claim and leave their customers in worse financial shape than they were in when they started. As few as one in 10 customers actually end up debt free in the period of time promised by the debt settlement company, meaning that most customers would have been better off filing for bankruptcy protection in the first place.
It is no surprise that the Better Business Bureau has called debt settlement companies an “inherently problematic business,” and the Federal Trade Commission, the U.S. Government Accountability Office and attorneys general from 41 states have found evidence of abuses by many such companies. Some of the shortcomings and abuses found are:
- Debt settlement companies charge their customers regardless of whether they successfully settle their customers’ debts.
- The fees for the companies’ services is often exorbitant—15 percent of the debt owed or higher.
- While having their customers save up for a settlement offer, many companies advise their customers to stop paying their debts, needlessly costing their customers interest and penalty fees (which increases their debt).
- Debt settlement companies can’t stop creditors’ efforts to collect debts, as debt collectors are not legally required to cooperate with them.
- If a debt is actually settled for less than the full amount, the customer must pay taxes on the amount forgiven.
Bankruptcy as an alternative
In many cases, bankruptcy’s offer of a fresh start may a better alternative to working with debt settlement companies. Unlike debt settlement companies, bankruptcy attorneys are regulated by the state’s bar and are legally required to operate in their clients’ best interests.
For customers facing foreclosure, car repossession, garnishment of wages or debt collection calls, bankruptcy is often the only way to stop these activities. Creditors are legally mandated to stop continuing their collection activities once bankruptcy has been filed.
In addition, filing for bankruptcy is a fraction of the cost of the debt settlement companies’ services. It can also eliminate all or part of a person’s debt without tax consequences most of the time.
If you are considering using a debt settlement company, it is advisable to review your situation with a skilled bankruptcy attorney. A bankruptcy lawyer can advise you on all your debt-relief options and recommend the best course of action for your individual circumstances.