Settlement Companies Worsen Debtors in Financial Distress
When you fall behind in the repayment of your debt, using a debt settlement company to help you dig out from your financial crisis sounds very appealing. However, it may leave you in a worse financial distress than before you signed up for their services.
A recent Consumer Financial Protection Bureau (CFPB) survey revealed that most consumers who sign on with for-profit debt settlement companies fall into a deeper financial burden due to late fees, attorney charges, accrued interest, penalties, and prohibitive service fees. Plus the fact that most debtors are unaware that there is no guarantee to reach a settlement agreement. If a settlement is reached, the debt growth can be about 30 percent higher than the original balance.
The biggest concern of the CFPB is that debt settlement companies are another way of taking advantage of people who are already in a financial distress.
It is a customary practice of debt settlement companies to offer representation on behalf of the debtor in financial distress to negotiate a settlement arrangement with the debt collector. This service typically states its aim is to substantially reduce the amount owed by 50% or more. Credit card companies and other debt collectors are often willing to negotiate for a lower amount of the debt balance. But when you use a debt settlement company, the service fee ranges from 15% to 27% of the debt owed or the amount saved by the settlement. Thus, dramatically reducing the debtor’s actual savings.
In addition, the debtor/client is usually advised to stop making payments on the debt obligation. Instead the money is deposited by the consumer in a dedicated account, such as an escrow account. The settlement company will then use these funds to pay creditors when a debt settlement agreement is reached. However, clients are often unaware that defaulting on a debt may cause additional interest and late fees to accrue on the account. Further, lawsuits by credit card companies sometimes result when payments to satisfy a debt obligation stop.
The average debt-settlement customer has 5 credit cards with debts totaling $25,000 or more.
Therefore, the settlement service fees are very attractive for debt settlement companies. But again, for the consumer, potential taxes owed on amounts that are being forgiven by debt collectors can substantially reduce the amount of savings settlement companies promise to their clients. Consumers need to settle at least half of their debt for at a minimum of 45% of the initial balance to enjoy any real financial benefit from debt settlement company services.
Debtors usually consider debt settlement company services as an alternative after speaking over the phone with a very skillful sales agent whose only objective is to make the debtors start sending funds to a dedicated savings account. These companies target those consumers who are in great financial distress and are thinking about filing for personal bankruptcy.
Many consumers end up seeking bankruptcy protection despite having gone through the process with a debt settlement company. The reason: it is a widespread practice with debt settlement companies to only negotiate credit card debt, leaving the consumer on their own with medical or tax debt. Hence, consumers who have a diverse amount of debt do not get all the debt relief that was promised, often leading to bankruptcy.
The Federal Trade Commission issued new regulations in 2010 that prohibited debt settlement companies from charging fees upfront.
This means when companies provide debt settlement services, fees may only be collected after a settlement agreement has been reached and the debtor has made payment to the creditor (either in a lump sum or in partial payments – which is the most common).
But before you consider debt settlement as an alternative, you need to perform due diligence regarding the impact of this process. Here are some facts about debt settlement.
The debt settlement process will affect your credit score. When you stop paying your debts and your accounts become delinquent, that information is reported to the major credit bureau agencies, Experian, Equifax and TransUnion. There is no way for a negative report to avoid damaging your credit score. The unpaid debt may remain on your credit report up to seven years, according to the CFPB.
Debt settlement is not the same as a debt management. Credit counseling companies usually provide the management of your debt by consolidating all your debt accounts into one. These companies are often nonprofit organizations partly funded by credit card companies that obtain upfront agreements with creditors; allowing a debt to be paid off over three to five years. This option still requires that significant monthly payments be made. It is common that the creditor agrees to no interest or a low interest rate and waives penalty fees. Contrary to debt settlement, the principal debt amount is required to paid in full.
The Justice Department maintains a list of approved credit counseling agencies. https://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm
Is there another option if I can’t pay my debt?
Fortunately, the answer is a resounding yes! SettleiTsoft® is a Free, web-based debt negotiation software designed to help consumers in financial distress combat predatory collection practices. By utilizing SettleiTsoft, debtors are establishing this convenient and seamless electronic means of communication as their preferred negotiation method. This should stop collection calls from creditors and allow the debt obligation to be amicably resolved. Since the software is easy to use with step-by-step instructions and topic-specific videos in every section, consumers can quickly become their own super-efficient debt settlement agents and begin restoring their financial peace of mind.
Another great benefit is SettleiTsoft’s capability of validating whether the creditor is indeed authorized to collect the debt in the first place. Thereby eliminating scammers who falsely claim the right to collect the consumer’s debt. Under the Fair Debt Collections Practices Act (FDCPA), the collector has 30 days to respond to the validation you requested through the SettleiTsoft system. Just make sure to send the letter via certified mail, which documents when you sent it and when it was received by the creditor.
While certainly SettleiTsoft is a great service for all those consumers in financial distress, the software platform also helps in many other ways. Accessible 24/7 via the Internet or Mobile App, SettleiTsoft provides a variety of services – from its powerful financial management tools that will help you develop a livable budget to its debt settlement capabilities, which include allowing you to communicate with your creditors in a secure virtual environment.
You may sign up anytime at www.settleitsoft.com or download the mobile app at the Google Play Store.