Top 10 Most Misunderstood Facts About Debt Settlement

Over the past few years debt settlement has been in the news, and not always in a good way. Many consumers have complained about the services they’ve received while others have been very happy. Much of the disparity in the perception of the service is due to misconceptions about the process itself.

So here are the top ten misconceptions I see out here on the front lines of the debt settlement industry.

1. “We’ll Stop All the Collection Calls.” Some debt settlement companies say they can stop collection calls by sending a letter. What they are referring to is sending the company a cease & desist communication letter to stop the collector from calling. But that letter only applies to third-party collection companies and has no power to stop the original creditor that you owe the debt to from calling. In fact, sending the letter and cutting off all communications can lead to you getting sued faster because the only route of communication left will be through the court. The original creditor, who the cease & desist letter has no power over, may just send your account to legal when they get the letter because they don’t want to hassle with the debt settlement.

[Related:  Join the Debt Diet Challenge with Jean Chatzky & Credit.com]

2. “We Will Take Over and Work With Your Creditors. You Won’t Have to Do a Thing.” When you took out the loan or credit, you signed an agreement with the creditor. The debt settlement company was not a party to that agreement and has no authority to intervene between you and the lender. The debt settlement company is providing a service on your behalf, and while you may give them permission to talk to the creditor, if the creditor does not want to deal with them—they don’t have to. Your creditor may have a policy against working with a debt settlement company. There is nothing that requires them to do so.

3. “We Will Make Your Creditor Accept Less Than You Owe.” A creditor does not accept a settlement because it makes the most sense—they accept a settlement only if the creditor’s policies and procedures allow the department you are communicating with to accept it. Some creditors are more receptive to settling for less than others. Without the assistance of a debt settlement company who is familiar with the current polices of a particular creditor, you don’t know if you’re getting a good deal.

4. “Don’t Worry. Debt Settlement Will Not Hurt Your Credit.” Creditors don’t entertain offers from people who are current on their bills. Typically ca creditors polices and procedures require the borrower to go 90+ days past due before they can offer a reduced pay off amount to satisfy the debt. During that time, payments are typically made to the debt settlement company assigned escrow account and not the creditor. This means you are electing to not pay the creditor and that makes them agitated. By not paying your creditor, you will be in default of your agreement and the creditor will begin to add late fees, higher interest and penalties to your balance owed. Your balance will grow larger. Your account will be moved into the collection queue, will be reported to the credit bureaus for lack of payment, and the creditor may sue you and attempt to garnish your wages. Debt settlement is not a process without risks and penalties.

[Resource: 11 Ways A Debt Collector May Be Breaking the Law]

5. “Once You Pay the Settlement You Never Have to Worry About The Debt Again.” Not so fast. Unless you get the agreement to accept less than the full balance as payment in full in writing from your creditor — and you keep a record of them receiving your settlement payments, it can come back to haunt you. It is not unusual for a creditor to claim years later that they never agreed to accept less than the full balance to satisfy the debt years later. The only thing that is going to get you out of that is proof of the offer and proof they received the payment. Be sure you make that settlement payment by some traceable means, like a draft from your bank or by check. Keep copies of bank statements or cashed checks with the settlement offer in a safe place with your other important papers.

Top 10 Most Misunderstood Facts About Debt Settlement (cont.) »

Image by iDanSimpson, via Flickr

6. “Settling Your Debt Will Improve Your Credit and Debt to Income Ratio.” Some debt settlement companies say debt settlement will help your credit report because it will lower your outstanding debt to income ratio. But that’s not the whole story. When you fall behind on your bills in order to settle your debt, the delinquency will be reported on your credit report for seven years from the time you became delinquent. Any lawsuits to attempt to collect the debt will appear as well. The balance of the debt that was settled and not paid, will appear as a bad debt for seven years as well. At the end of the process you may no longer owe your creditors but your credit report will be damaged and need some serious attention to bring your credit score back up.

[Resource: Consumer Guide to Debt Settlement]

7. “You Can’t Trust Any Debt Settlement Company.” This is simply not true. Some debt settlement companies, and especially those that are a member of the AACC, are open and transparent about their actual performance in settling debt, only charges you a fee as a percentage of savings when they do settle, and will maintain any payments you make in a bank account monitored by a third-party escrow company. You want to look for a company that will share their actual performance statistics with you in writing to show you their track record. Working with a good debt settlement company can be beneficial if debt settlement is right for you. They will have the experience to know if the deals being offered are good based on the current policies of the creditor.

8. “You Have to Hire Us to Settle Your Debt.” There are some companies out there that will teach you how to settle your own debt for a fraction of the cost of paying a settlement company to do it for you. They can guide you through the process and coach you when you have questions or concerns as you go. Two of the companies that offer this coach supported process are Consumer Recovery Network and ZipDebt.

9. “Hiring an Attorney to Settle Your Debt is the Best Way to Go.” It is not necessary to pay a lot of money to hire an attorney to settle your debt. Settling debt is not a function of legal pressure, but more of knowing the current policies and procedures of the major creditors. If you have a local attorney that is going to perform all the work locally, and you have a trusted relationship with that attorney, then maybe you’ll want to work with them. However, if you are being pitched debt settlement services by a salesperson for debt settlement services provided by a legal network, then you may want to get a second opinion before you agree to enroll. I find these legal networks to be pricy and charge all their fees on the front-end of the program, before the debt is settled, even if they never settle your debt. And while these legal networks may promise to represent you if you are sued, the devil is in the details. You can read my review of one of these attorney network model contracts here. I think you’ll be surprised what it didn’t cover and how it really cost about twice as much as other debt settlement companies offering performance based fees.

[Resource: Get your free Credit Report Card]

10. “Debt Settlement is the Best Way to Get Out of Debt.” Debt settlement is not for everybody. It is one arrow in the quiver to pull when dealing with debt problems. Other common solutions include credit counseling, bankruptcy, making income or budget adjustments, a debt consolidation loan, and working with the creditors directly. Debt settlement is most appropriate if you have cash on hand to pay 50% of the balance owed without raiding retirement accounts. While debt settlement may help you avoid bankruptcy—and is sold as a way to avoid bankruptcy, bankruptcy is not a process to be feared. In fact, it is the only solution that gives you any legal rights and power over the creditors regarding debt problems.