You can’t turn on the television today without seeing an advertisement for debt settlement anymore. Debt settlement is a process where a company compiles a list of your debts and plans a strategy where you will pay off your debt.
From the image below you can probably grasp my opinion of them.
There is no new Obama program that requires banks to work with you. There is no government program that is there to help you. The banks couldn’t care less whether or not they took TARP money when they decide whether or not to give you a deal on your credit card bill.
Lets discuss the pros of debt settlement.
OK now we’re done.
Lets discuss the process. First of all, you either got a post card from Florida, California, or Nevada telling you they can help you with your debt, that or you hear one of those radio or TV advertisements laced with lies about the wonder that is debt settlement and you called a phone number to speak with a representative.
If you sign up, you will be given a 36 month target in which you will be able to pay off your debt. Concentrate on the word target. If you miss the target, its not the debt settlement company’s problem, its yours.
The first five payments will got to pay for debt settlement. The reason they take their payment up front is because they know you are probably not going to finish the program, so they need to get paid now. Often the fee is 1/4 of your debt, so if you have $20,000 in debt, the debt settlement company will eventually pay $5,000 for the service.
During those five months, you will probably notice that your phone has stopped ringing. The debt settlement company will send a letter to each of your creditors asking them not to contact you and instead contact them.
Every one of your credit cards will go past due, and each time you go past due your credit will take a hit. By the time this process hits its stride, you will be treated by the credit bureaus as if you have filed Chapter 13 bankruptcy.
After five months, with their fee in hand, the debt settlement company will start to contact your creditors from smallest balance to largest and start negotiating for a better deal.
Some of them claim they can cut your balance by 60%, but here is the problem, what are they cutting? If you start with a $1000 balance and you go past due five months, what do you suppose happens? Well, you get a late fee, most likely $39… if you go overlimit, and you probably will, you get an overlimit fee of $39. Finally your interest rate will spike to a level that would make Al Capone blush, and on that $1000 balance you could be getting charged $30 per month in interest.
After five months of this, your balance is now $1540, and then the debt settlement company says they got you a settlement of 40% on your balance, or $924 off your $1000 debt, what a deal!!!
So for a fee of 20% of your debt, you get to risk getting sued, having your credit destroyed, and piling up debt without any guarantee of getting a deal. There are a lot of creditors who will not deal with debt settlement companies!
Chapter 7 bankruptcy is superior to debt settlement.
For starters, in Chapter 7 bankruptcy, your debts (certain debts are not discharged) are erased, not negotiated, so the banks are forced to stop collecting the debt and leave you alone.
In Chapter 7 bankruptcy, your lender must stop all collection efforts or face a potential bankruptcy stay violation.
While it is true that Chapter 7 bankruptcy will hurt your credit report, the damage is done in one fell swoop, not the death by a thousand cuts that debt settlement programs hit you with. Unlike debt settlement, you can literally begin improving your credit the day your bankruptcy is discharged.
Bankruptcy is not for everyone, but I don’t know anyone who has ever made it through debt settlement successfully. Debt settlement has an awful track record and usually leaves the consumer in worse shape, and with a lighter wallet.
Don’t buy the lie, there is no government program to bail you out of your debt, but there is bankruptcy.
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Brilliant! Debt settlements are almost 100% scams. In fact the term “debt settlement” is mostly a lie – debts virtually never get settled and honest consumers get ripped off. After they file bankruptcy, we bankruptcy lawyers get to pick up the pieces and sue for recovery under state consumer protection laws.