By: Jeena Cho

Debt settlement companies are running their ads everywhere - “Settle your debts for pennies on the dollar.” “Government sponsored debt settlement plan.” “We have special programs with the credit card companies to settle your debt.” The truth of the matter is that there is nothing that a debt settlement company will be able to do for you that you probably could not do yourself. Just in the last month, I met with at least 6 clients who has been scammed by these so-called debt settlement companies.

Here’s a run-down on how debt settlement companies work:

1. Instead of paying your credit card, you make monthly payments to the debt settlement company. (Generally, a fixed amount.) You will be required to stop paying your credit cards.
2. The debt settlement company almost always receive their fees upfront. In another words, not a single dollar may be going towards actually settling your debts for months.
3. After you have accrued sufficient funds, the debt settlement companies will offer to settle your debt with your creditor.

Here’s what the debt settlement companies won’t tell you:

1. Credit card companies are under no obligation, what-so-ever to accept any offers. There is no special government backed program. They do not have “special” relationships with the credit card companies.
2. Frequently, especially with Chase and Bank of America, they will simply choose to sue you.
3. If you are sued, the debt settlement companies will not defend you. To litigate a civil case can cost tens of thousands of dollars. The debt settlement company is not going to pay your attorney fees.
4. 1099-C. If the debt settlement company is successful in negotiating the debt, the amount forgiven may be taxable to you. (For example, if you had $100,000 in credit card debt and it’s settled for $50,000, you will owe taxes on the $50,000 that is forgiven. If you are in the 15% tax bracket, that will mean you will owe Uncle Sam $7,500.)
5. Many debt settlement companies are scams. That’s right. For more information, go to the FTC website.

If you have money to be able to settle your debt, you can try the following.

1. Contact the lender directly. Unfortunately, most credit cards won’t deal with you until you’ve been behind on your payment. Non-payment will mean your credit score will suffer.
2. Considering offers. In general, once you fall behind on your payments, credit card companies will send you settlement offers. (They may also sell or transfer the debt to a third party collection agency.) The more you can offer in one lump sum, the better the deals will be.
3. Ask for it in writing. Any offers should be verified in writing. Ask the creditor to send you in writing the offer you will sign.
4. Paying the settlement. NEVER EVER send the settlement check out of your personal checking account. Why? Because, you do not want them to have your checking account number, which they can use to draw money out of if they are successful in winning a lawsuit against you. You should always send the settlement money in money order or cashier’s check.

Word of caution. In order to settle your debt, you need cash. I frequently meet with clients who does not have any disposable cash that insist on settling their debts. Before you spent what little cash reserve you have, or liquidate your assets, sit down and plan out an exit strategy. Ask yourself, “how much debt do I have?” and “how much can I possibly save to get out of debt?”

Disclaimer: The information contained in this article is informational in nature and is not a substitute for legal advice. Consult with an attorney for advice on your particular circumstances.

Tagged as: bankruptcy, credit card debt, Debt Settlement, settlement plan