In 2009 I worked for with some of the largest debt settlement companies, many of which are now out of business or shut down by their state’s Attorney General. Debt settlement services are still rampant across the country. They give you high expectations that you can cut your monthly payments and debt in half. For someone who is knee deep in debt, they’re very susceptible to marketing gimmicks that these companies employ.
You’re Talking to Salespeople, Not A Credit Counselor
I was guilty of this. When I first worked with these debt settlement companies, I hired a bunch of salespeople. I ran them through scripts, rebuttals, and closing statements. If the customer was considering bankruptcy, we had a rebuttal for that. If the customer was considering a debt management program from a credit counseling company, we had a rebuttal for that. If the customer was scared of the getting sued, we had a rebuttal for that. They were trained on how to be assertive without sugar coating the program.
The bulk of their earnings were dependent on how many customers they were able to sell, so you can imagine how problematic this turned out to be. Bottom line is that most debt settlement salespeople have very little interest about helping you pick the best option.
When debt settlement companies quote you a monthly payment, they essentially assume that each creditor will settle for .40 on the dollar. So if you have $10,000 in credit card debt, they will bake in another 15% for their service fee to make it a grand total of 55%. Out of the monthly payments, debt settlement companies will tell you that your payments will be held into an escrow account. The problem is that many companies take most of their fees upfront first.
But Wait, Are They Allowed to Take Upfront Fees?
The short answer is no. So how exactly does it work? Attorneys are exempt from the TSR (Telemarketing Sales Rule) so a lot of companies piggy back off their licenses. What’ll happen most of the time is that a lot of consumer who enroll in debt settlement programs will eventually file for bankruptcy after a creditor decides to take legal action. Chapter 7 and Chapter 11 bankruptcy can be filed every 8 and 2 years, respectively. Some companies even go as far as adding a “monthly maintenance fee” instead of charging you a percentage of your total debt amount.
We’re disappointed that the FTC came out with this ruling, especially with regards to the advance fee ban… It’s just a fact that companies need revenue coming in prior to the actual settlement being made.
— David Leuthold
The Association of Settlement Companies
Here’s the truth. If you’re operating a debt settlement company and can acquire customers who are the best suited for the program, you can probably settle their debts in the first 3-4 months. Once you do that, you can charge a fee. If you’re talking to a debt settlement company that charges an upfront fee, it should be a clear indication that you should steer clear.
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Cease and Desist Letters Are Crap
When a debt settlement company tells you that they can stop creditor calls by sending a cease and desist letter, it’s true. But it comes at a cost. If a creditor has no means to get in contact with you, the only other way is to order a judgment, aka a lawsuit.
And then I Switched Sides
In 2010, it wasn’t long before I knew that something wasn’t right. A lot of our customers were calling and and telling us that nothing was being done. They kept receiving collection calls after promises that the calls would end. Some clients who had been in the program for over a year barely saw any money in their escrow account. All of the payments went directly to the debt settlement company.
I spent the better part of the year pulling the customers out of the program and getting refunds for them. It was the most painful process I’ve ever been in. Customers were essentially ripped off and were in worse shape than they were before. Some of the customers even took legal action against the debt settlement companies (and they won).
So Here’s what You Need to Know About Debt Settlement
To make it short, you don’t need to hire a debt settlement company. Most collection companies will already offer you a settlement proposal once it gets into their office. The offer will vary, but it’s a starting point for you to negotiate it down.
Attorney backed debt settlement companies are not safer. In fact, it’s probably worse. Debt settlement should never be really seen as an approach to tackle your debts. If you fall behind on your payments and you’ve exhausted all your options, debt settlement might be a viable option. No one should really tell themselves, “I lost my job, I can’t pay my debts, so I’m going to just settle my debts”.
Always look into a debt management program or consult with a bankruptcy attorney. If none of these makes sense, then falling behind on your payments might be inevitable.
Debt settlement companies don’t have a secret formula to get you out of debt, period!