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The Pitfalls of Using a Debt Settlement Company

When searching for a solution to an overwhelming debt burden, Debt Settlement seems to be one of the most popular options. This is not because it is the best option, but because Debt Settlement is the most heavily advertised. Many Debt Settlement companies are actually extensions of the banks and credit card companies themselves. They have deep pockets to advertise, and would rather get a smaller amount from you, before they get nothing at all.

There are some reputable Debt Settlement companies out there, and some that should be avoided. A good company will attempt to contact your creditors and negotiate a payoff or settlement for less than is owed. This can get somebody out of debt very quickly, assuming the settled amount can actually be paid quickly.

There are a few issues to be aware of. A Debt Settlement company will claim that you have the right to settle your debts for 30 to 50% of your balance. This is actually true. You do have the "right" to settle. Unfortunately, it does not mean that your creditor has the obligation to actually agree to a settlement. Nobody can force a creditor to agree to a smaller payoff amount. If a creditor does agree to a settlement amount, the terms of payment must also be agreed to. The creditor might agree to a reduced amount, but only if that amount is paid in full immediately. They may also agree to a payment plan, but the total settlement amount will probably be higher. If a payment plan is agreed to, you must stick to the payment schedule, or the agreement might be voided and the creditor will begin to demand full payment again. Check the fine print for that one.

A person who has hit financial troubles, but has remained current with their credit card payments, may feel like they are being pro-active by contacting the bank to explain their financial situation in hopes to work out a payment plan or a reduced settlement amount. Unfortunately, this often just raises a red flag on the account, giving the bank another excuse to raise the interest rate on the account, and perhaps increase the minimum monthly principal due as well. How's that for customer service?

Most credit card companies will not even discuss a settlement if the cardholder is current on their payments. For this reason, the settlement company might instruct you to stop making your payments to the credit card company. Once the payments are in arrears, the bank may then be open to negotiating a settlement.

If you are no longer making your monthly payments on your credit cards, you will need to start putting money into a cash reserve account. This cash reserve may need to accumulate several thousand dollars before a settlement company will actually begin to contact your creditors. In the meantime, negative entries will be reported to the credit bureaus, and the harassing collection phone calls will begin.

In addition, the Debt Settlement Company will also want their fee, which can be 5 to 20% of the negotiated debt. So how much is really being saved? This fee to the settlement company may also be taken from your cash reserve account prior to the build up of cash used to settle the account. So you could spend hundreds or even thousands of dollars before building any cash that would actually be used to negotiate a payoff. So be sure to have their plan in writing, of exactly what the settlement company will do, and when they will do it.

In reality, there is nothing a settlement company can do for you that you cannot do for yourself. In addition, negotiating a settlement yourself will save the cost of the fee paid to the settlement company. This is money that can be used towards the settled payoff amount, instead of into the pockets of the settlement company.

Think about it. Educate yourself. Learn something. It's your money.

About the Author

Billed as The True Debt Advisor (TrueDebtAdvisor), Jim Vrana's mission is to educate and empower people to overcome their financial challenges. The time-tested legal procedures used to eliminate credit card debt have been used by thousands of people with tremendous success.

Contact:
Jim Vrana,
(800) 637-1785
TrueDebtAdvisor

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Jan/22/2009 Comments Comments