We Call Bullshit On Debt Settlement Scams

We call bullshit on debt settlement scams! Let’s take a look at how you’re getting ripped off and what your options are for really solving your debt dilemma without becoming a victim.

What is debt settlement?

When you’re behind on your debt payments, bad consequences pile up. Your credit history features a prominent black mark, your credit score tanks and lenders or collection agencies put your phone number on speed dial.

The upside is that your creditors — worrying that they might never get a penny from you — are suddenly willing to negotiate your balance. So instead of owing them that $5000 bill, you may be asked simply to pay $3000 to settle your debt. And they’ll forgive the remaining $2000 entirely.

How you’re getting scammed

The good news is that the debt settlement process itself is completely legit. And many people turn to debt settlement companies to work with creditors and handle this unfamiliar process. But some debt settlement companies are downright sleazy in scamming honest people who want to deal responsibly with their debt!

Many of these businesses require payment upfront — a 100% illegal practice forbidden by the FTC. In fact, debt settlement companies may only bill you once they’ve successfully settled or reduced the debt you owe.

Other settlement agencies lure you in with guarantees that your debt will be settled or the collection calls will stop. But whether your creditors agree to settle is entirely up to them — not the settlement company. Plus, it’s possible that some of your lenders will get on board while others will continue insisting that you pay the full amount owed.

Finally, some debt settlement companies actually recommend that you stop working with your creditors entirely — no more communication and no more payments toward your debt. This is the worst advice! When you ignore your debt entirely and pay nothing, your credit score goes down the toilet. And, now that your creditor has nothing to lose, the possibility they’ll sue for the balance you owe increases.

Is there a better way?

Absolutely! If you’re definitely going with debt settlement, do your research. There are legitimate settlement companies that will help you work out the best arrangement possible with your lenders.

But don’t think you need to use those businesses. You can actually hammer out a negotiated payment directly with your creditors on your own. Or you can use a trusted lawyer to act as an intermediary for you.

For most people though, debt settlement actually isn’t the best option for tackling debt. Entering into a settlement deal usually comes with some major headaches:

  • A lump-sum payment that you have to provide fast in order to settle the debt;
  • Huge fees for debt settlement companies that can easily be 15% to 25% of the debt you owe;
  • A major hit to your credit score, since you’re not actually paying off your full debt; and
  • A massive tax bill, since you’re typically required to pay taxes on the forgiven debt amount.

Debt settlement alternatives

Fortunately, there are some excellent alternatives for beating debt:

  • Debt management programs: You’ll still pay your entire balance, but you may qualify for a longer payment period, reduced fees or a lower interest rate while doing it.
  • A heart-to-heart with your creditors: Your lenders may actually be willing to lower your interest rate simply because you asked! There’s zero downside to placing the call, and negotiating your interest rate is easier than you think.
  • A debt repayment strategy: Paying the minimum owed each month is a quick ticket to never-ending debt. To accelerate your exit (and pay less interest while you’re at it), adopt a proven method for paying your debt down as quickly as possible.
  • Work with a professional: Debt can be a serious problem that’s hard to navigate. So get on the right path quickly by working with a trusted expert. Talk with your financial advisor or call up a certified credit counselor who can recommend the best option for you.

Beating debt is hard enough! We definitely don’t need predatory businesses taking advantage of when folks are in a bind. So ditch the scammers, explore your options and then commit to Living Within Your Means as you chart your own best path to Financial Freedom.

image credit: Bigstock/fizkes

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