You’ve undoubtedly heard the old adage “if it sounds too good to be true, it probably is.”
Unfortunately, this is often true and is especially so in the category of debt relief. For example, two years ago the Better Business Bureau was warning families with financial problems to be careful of debt settlement companies that make misleading promises.
Some of these companies claim that they can quickly eliminate or reduce credit card debt. In fact, as of April 2010, the BBB had received more than 3500 complaints from families who had paid hundreds or even thousands of dollars to debt settlement companies only to then fall deeper into debt.
All 50 states
Since 2007 when the recession began, the Better Business Bureaus in every state have seen complaints from consumers regarding the way the were treated by some debt settlement companies.
The Attorney Generals in a number of states including Texas, Maine, Florida, Idaho, West Virginia, Vermont and New York have also seen complaints from angry consumers. In fact, they have taken some of the debt settlement companies such as Debt Settlement America, Credit Solutions of ___ and Financial Freedom America to court. The company Credit Solutions of ___ alone has accounted more than 1600 complaints in the last 3 years.
How debt settlement is supposed to work
The way that debt settlement is supposed to work is that the consumer pays a fee to the company that will be handling the settlement. The company works out a settlement with creditors for less than what its client owes. The debt settlement company will work with the customer to establish a plan whereby the customer puts money into an account that’s administered by a third party, the debt settlement company or into a trust that’s controlled by the client. The negotiated settlement is than paid out of this account. As a general rule, it will be anywhere from six months to a full year before there is enough money in the account to begin settling debts.
What the complaints allege
The problem that is causing most consumer complaints is that the money they paid a debt settlement company was never used to settle their debts. As a result, some people have been sued by their creditors, or have seen their wages garnished.
In other cases, consumers had made payments for several months, decided to not continue with the settlement process and then discovered that the debt settlement company would not refund the money, which in one case was $15,000.
Be careful
The BBB listed these red flags that families should watch out for before signing up with any debt negotiation or debt negotiation firm.
- Big upfront fees–watch out for companies that make you pay a lot of money before it actually settles any debts
- Promises that seem too good to be true–if the company promises that it can reduce your debt by more than 50 percent even before they look into your financial situation, you should view this as a true danger sign
- That is a fast and fast process–any claim that you can reduce debt quickly and easily should be viewed skeptically. True debt settlement takes some time and will definitely have a harmful effect on your credit score.
Before you sign anything
Before you sign up for any debt reduction program, be sure to check with the Better Business Bureau to see how the company is rated. It’s also a good idea to check its history–that is how long it’s been in business and its officers–and whether or not it belongs to legitimate organizations such as the US Chamber of Commerce.