Hello, and welcome to Your Money 2.0. I’m Christopher Viale, president of Cambridge
Credit Counseling. We’ve all seen commercials from debt settlement
companies claiming to save you 50, 60, or even 75% on your overall debt, all while somehow
improving your credit. Using imagery like the American flag, and
even news footage of President Obama, they encourage viewers to use debt settlement as
a shortcut to dealing with their financial problems. Even worse, these advertisements often misrepresent
the effectiveness of such programs, and some even insinuate that the government’s stimulus
package provides you with the right to forgo your debt payments. This false advertising goes to great lengths
to hide the truth about debt settlement services – a minuscule amount of individuals who
use these programs actually gain any benefit. Why doesn’t debt settlement work? Credit card companies are generally unwilling
to settle for less than what is owed unless there are extenuating circumstances, but if
there is a good reason, it can be an option worth considering. For example, let’s say you were injured in
an accident that left you unable to work. The resulting investigation indicates that
the accident wasn’t your fault, but you still have to wait several months before you
receive full compensation for your injuries. In the meantime, your lack of income throughout
the rehabilitation period results in several of your accounts becoming delinquent. One by one, your creditors begin calling. Without your regular income, it quickly becomes
difficult to satisfy all their demands. When you receive your insurance payout, you
may decide that it’s in your best interest to settle some of the debts you’ve fallen
behind on. In our example, your credit history has already
been affected because of nonpayment, and the insurance money can give you a head start
on the lump sum the settlement company will demand for “negotiating” with your creditors. It will take time to rehabilitate your credit
after a debt settlement – perhaps a long time, and that’s the trade-off you make
by settling for less than you owe. In the scenario I laid out there were very
specific circumstances that indicated a debt settlement may be a good option. The problem with how debt settlement companies
operate is that they don’t work within the confines of your circumstances. Settlement companies will offer their services
to anyone who has a specific amount of debt, even if the settlement will eventually devastate
someone’s credit history. Many debt settlement services insist that
a consumer must have at least $10,000 in debt before they’re eligible for the service. Why? Because a debt settlement service is not concerned
with helping. Their primary concern is profitability. If you use a debt settlement service, you’re
probably going to be set up on a monthly payment arrangement and what most people don’t realize
is that those monthly payments are not sent to their creditors. The debt settlement company will keep your
money in an escrow account until they have enough money to start negotiating with creditors. Often, the first couple of months of payments
may be retained by the company as fees for their service. Therefore, the settlement process can take
several months, even years, and as you can imagine, if your creditors aren’t being paid,
your credit history is going to be significantly damaged. What’s even worse is that most people don’t
realize what’s happening. When you join a debt settlement company, cease-and-desist
letters may be sent to your creditors. If that happens, your creditors will be unable
to communicate with you. With no way of determining your intention
of dealing with the debt, your creditors may have no choice but to charge off the account
after four to six months of non payment. Your account could then be turned over to
a collection agency, or to an attorney to begin legal proceedings. By the time this has happened, your original
debt will probably have increased significantly due to non-payments, fees, and the interest
that has been compounding while the settlement company held onto your money. Some, and I stress some, collection companies
and attorneys may entertain a settlement proposal, but even if they do, there are still more
concerns you may face. Join me next time when we’ll talk about the
true costs of debt settlement, including the possible tax implications you could face by
choosing such an option. As always, we welcome your feedback and ask
for your thoughts and suggestions by e-mailing us at [email protected] Thank you for watching. Until next time, I’m Christopher Viale for
Cambridge Credit Counseling.