Many people lost their jobs following the housing crash of 2007. Some companies such as Lehman Brothers were forced to completely close down, leaving thousands of employees jobless and wee forced to turn to debt settlement. Here were the statistics for just four months in 2008.
September 2008 – 432,000 jobs lost
October 2008 – 489,000 jobs lost
November 2008 – 803,000 jobs lost
December 2008 – 661,000 jobs lost
This continued clear into March of 2010 before there were more jobs created than jobs lost.
The rise in popularity of debt settlement
Lenders have been doing debt settlement for literally thousands of years. However, it did not become prominent here in the U.S. until the late 1980s and early 1990s when bank deregulation loosened consumer lending practices. It become even more popular following the Great Recession when many Americans found it impossible to repay their debts.
According to the U.S. Census, “Between 2000 and 2011, those in the 35 to 44, 45 to 54, and 55 to 64 age groups experienced the largest increases in median debt – it increased by $21,350, $23,055, and $27,346, respectively”. These statistics make it clear why debt settlement increased so much in popularity following the Great Recession. In fact, it has become the top way for consumers suffering financial hardships to eliminate troublesome debts.
The scam artists
Unfortunately, as debt settlement become more and more popular, it attracted a lot of scam artists. These were companies that front loaded their fees so that their customers were made to spend thousands and thousands of dollars before any of their debts were settled. Some of these fraudsters would disappear without ever actually settling any of their customers’ debts only to reemerge a few months later with a new name, address and phone number.
What did the FTC do?
In October, 2010 our FTC (Federal Trade Commission) clamped down on many of these scamsters to the point where they nearly threw the baby out with the bathwater. But thanks to what the FTC did, debt settlement is now cheaper and safer than ever before. However, it’s important to understand that there are still some scam artists just waiting to pray on debt-strapped consumers.
How to spot the scam artists
The biggest telltale sign of a scam debt settlement company is what we’ve already mentioned – that it will try to collect big fees upfront. A second telltale sign is if it makes specific claims such as that it can reduce your debts by 70% to 80% on the average. It may say it can completely resolve all unsecured debts such as personal loans, department store accounts, medical bills, credit card debts, student loans and accounts that have gone to collection agencies. Or it may advertise a new “government program” designed to bailout personal credit card debt. And finally, it may try to convince you that the settlement process will be fast, painless and easy.
The fact is that none of these claims is true.
You’ll get no grandiose promises
Unlike the scam artists no reputable debt settlement company will make grandiose promises such as reducing your debts by 70% to 80%. A second sign that you’re dealing with a reputable debt settlement firm is, of course, that it won’t require any upfront fees. The way that most legitimate debt settlement companies work is that they will add a percentage of their fee to each of your monthly payments but not actually collect the money until they have settled all of your debts. This is basically a 100% satisfaction guarantee as you could drop out of your program at any time and for any reason and not pay the settlement firm a single cent.
How would I find a reputable debt settlement company?
Fortunately, it’s very easy to find a legitimate debt settlement company. Just hop on the internet and go to a site such as www.topconsumerreviews.com/settlements where you’ll find a list of the top 10 debt settlement companies. A second source for good information about debt settlement companies is the site TheSimpleDollar.com where there’s a a list of the best debt settlement companies for 2016.
It’s also a good idea to check the company’s status with the Better Business Bureau. Reputable debt settlement companies will have a rating of at least an A and it will have successfully resolved any disputes it’s had with its customers.
A legitimate debt settlement company won’t try to shoehorn you into a debt settlement program. Instead, you will have a debt counselor that will review the pros and cons of other options such as consumer credit counseling or a debt consolidation loan and then let you decide if debt settlement is your best choice.
You should also be able to go online and find testimonials from people that had actually worked with the company and were genuinely satisfied with the help they had received.
Last but not least, when you send your monthly payments to a legitimate debt settlement company the money will be deposited into an FDIC-insured trust that you control. In other words, none of the money you pay the debt settlement company can be used without your express approval.
Questions and answers about debt settlement
Q. How do debt settlement companies work?
A. Your counselor at the debt settlement firm will develop a program designed to get you debt-free in anywhere from 24 to 48 months. It will include a payment that you will be expected to transfer to an escrow-like account each month. For example, let’s suppose you owe a total of $38,000. In this case, your monthly payment might be around $790 ($38,000 divided by 48), plus 1/48th of the settlement firm’s fee. The settlement company will contact you when enough money has accrued in your escrow account to settle one of your debts and ask you to release enough money to pay for the settlement. This process will continue until all of your debts are settled.
Q. How debt settlement works?
A. The idea behind debt settlement is simple. You or the debt settlement company contacts your creditors and offers to make lump sum payments to “settle” your debts for less than their balances. If a creditor accepts the settlement offer it will then treat that debt as paid in full.
Here’s a short video that explains in more detail how debt settlement works and how much you could possibly save by using it.
Q. Are debt settlement companies a good option?
A. This will depend on several factors. For one thing to be a good candidate for debt settlement you must owe at least $10,000 and the more the better. You should be four or five months behind on your bills and you should have at least explored other options such as consumer credit counseling.
Q. How is debt settlement reported on credit reports?
A. Debts that have been settled are generally reported as “settlement”, “settled,” “partial payment accepted”, “debt settled for less than full amount due” or some other similar wording. In other words, they will not be reported as “paid in full”. In addition, whatever the wording it will be reported on credit reports in the same area as comments such as “closed by credit grantor” or “this account is in dispute”.
Q. How does debt settlement affect credit score?
A. Debt settlement will definitely have a negative effect on your credit score. Only the company that invented credit scoring, FICO, knows for sure what debt settlement would do to it but some experts believe it would drop it by 80 points or more. Of course, if you chose debt settlement because you were four or more months behind on your bills then your credit is already so far in the dumpster that debt settlement might not actually have much of an effect on your credit score.
Q. How does debt settlement work with credit cards?
A. Debt settlement can be a very good option if most of your debt is credit card debt. The reason for this is that credit card debt is “unsecured” debt, meaning that you didn’t have to provide any asset as collateral to secure it. What’s more, the credit card issuers are usually willing to settle your debts – assuming you can convince them that it’s in their best interests to do so. How do you do this? You basically need to convince the lender that if it refuses to settle with you then your only alternative will be to file for bankruptcy. Most lenders are willing to “take half a loaf” rather than get nothing.
Q. How to do debt settlement yourself?
A. If you choose to handle debt settlement yourself the process is very similar to when you hire a debt settlement firm. You will contact each of your lenders and offer lump-sum payments to settle your debts for less than their actual amounts. The major difference is that you will need to have the cash on hand to pay for any settlements you can negotiate as no lender will agree to settle unless you can send it the money immediately either in the form of a cashier’s check or wire transfer. If you choose DIY debt settlement you will need to be a skilled negotiator as you will be up against some real pros. You should also be able to convince lenders that you’re having serious financial problems, which is why they need to settle with you.
Q. What do debt settlement companies charge?
A. Reputable debt settlement firms charge a percentage of the total amount of your debts. This generally ranges from 15% to 25%. Before you sign with a debt settlement company it’s important to do the math and factor in its fee. Going back to our example of $38,000 owed it would cost you $9500 – assuming a 25% fee. But if the company were able to get that $38,000 cut in half – to $19,000, you would still save $9500, which would make debt settlement more than worthwhile.