Do you find yourself laden with debt? Have you been tempted to contact a debt-settlement company that promises to reduce your debt by negotiating with your creditors?
A new report issued by the Center for Responsible Lending indicates that consumers who enroll in a debt settlement program may increase their debt by as much as 20%.
What Is Debt Settlement?
Debt settlement can occur when a company you retain negotiates with your creditors to accept a lump sum that is less than the amount you owe. Unsecured debt, such credit card and medical bills, are usually eligible for settlement. In a typical case, a consumer will contact a debt settlement company, enroll in a program, and pay a fee once the debt is settled.
It sounds great, doesn't it? But problems can and often do ensue.
The inherent problem of the debt settlement process is that these types of companies advise its clients to stop making payments to creditors. Ostensibly, this tactic is used to communicate to the creditors that the consumer is in trouble and to further entice the creditors to accept partial payments. However, when consumers stop paying their bills, their credit score plummets.
In addition, there are times when creditors refused to negotiate the debt owed. In those cases, consumers can become embroiled in continued collection activity and lawsuits.
Companies Claim Creditors Will Pay "Pennies on the Dollar"
Debt settlement companies often advertise that consumers will pay far less than the amount owed. According to the new report, a consumer's debt can instead increase as much as 20% when a debt settlement company tries to mediate a settlement.
Up until 2010, consumers who retained a debt settlement company were required to pay upfront fees. The Federal Trade Commission stepped in to ban that practice; however, the regulation only applies to for-profit companies. As such, "attorney model" debt settlement companies that employ attorneys and paralegals to meet with clients can circumvent the law and continue to charge large upfront fees.
According to the Center for Responsible Lending report, in addition to fees paid to the debt settlement companies, consumers can face other unexpected fees to third parties.
Another problem can arise as well. Few consumers know about the tax consequences of debt settlement. In some cases, consumers will be required to pay income taxes on the amount of debt reduced.
Few Program Enrollees Successfully Reduce their Debt
The 2010 FTC ruling was intended to protect consumers. However, reports from the Colorado Attorney General's office indicate that bans on advance fee payments have not always lead to improved outcomes for consumers. In fact, for consumers who enrolled in 2011, only 7.6% settle their debts, 38.1% remained enrolled, and 54.3% left the program.
Tips from the Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau warns consumers that debt settlement may leave you deeper in debt. The bureau advised consumers to avoid doing business with a company that promises to settle your debt if the company:
- Charges fees before it settles your debts.
- Touts a "new government program" to bail out personal credit card debt.
- Guarantees it can make your debt go away.
- Tells you to stop communicating with your creditors.
- Tells you it can stop debt collection calls and lawsuits.
- Guarantees that your unsecured debts can be paid off
If you need immediate debt relief, contact our lawyer by calling us at 707-623-1875 to schedule a free consultation. You can also fill out our online submission form. We offer flexible scheduling arrangements and accept all major credit cards.