An excellent article appeared today on smartmoney.com about the downside of using a debt settlement company. Personally, in my years of banking, we have worked with very few of these companies. Why? Because as a creditor, we could offer the debtor a much better deal by working directly with them instead of through the debt settlement company. By working directly with the debtor, we're able to negotiate a settlement plan directly, eliminating any 'fair share fees' or other costs that detract from repaying the debt.
What debt-settlement companies won't tell you
1. Debt settlement may not be right for you
Debt settlement is a niche solution that's right only for a small segment of the population, says Charles Phelan, founder of ZipDebt.com, who coaches consumers on do-it-yourself debt settlement. But don't expect to hear that from a debt-settlement company. "People working the desks at the debt-settlement companies are working on commission and have the incentive of bringing as many people as possible," he says.
You could be a good candidate for debt settlement if you're heading toward bankruptcy, but don't qualify for filing Chapter 7, Phelan explains. (Under Chapter 7, most of your unsecured debts are written off, but you'll most likely have to sell some property including your home). "Most people who can qualify for Chapter 7 in all likelihood lack the cash flow to make debt settlement work for them," he says. Debt settlement, in other words, might be a viable alternative to Chapter 13, which sets up a three- to five-year schedule with your creditors to repay your debts. (For more details on qualifying for Chapter 7 or Chapter 13, read our story.)
Likewise, if you can scrape up the cash to pay off your debts in a debt-management program, where you work with a debt-management company to pay off your balances in full but with lower interest rates, then debt settlement isn't the best solution.
2. Your credit will suffer
3. You could get sued
4. There are tax consequences
5. Our services might be illegal