Oklahoma Consumers Beware of Debt Settlement Companies

As the economy weakens, a growing number of consumers are paying big money for services from debt settlement companies that claim to be able to settle debts for a fraction of what is owed. However, the truth of the matter is that most customers end up regretting their decision to work with a debt settlement company.

The number of consumer complaints about debt settlement companies is skyrocketing, says John Ulzheimer, president of consumer education for Credit.com.

The Federal Trade Commission has also begun to investigate debt settlement companies because many of the companies have misled consumers about what services they could deliver, how long it would take and how much it would cost.

Debt settlement companies usually charge hefty up-front fees, and their tactics can worsen consumers’ credit scores and leave them in greater debt than when they started.

The companies often charge an up-front fee of 10% or 15% of the total amount owed. They may also charge monthly fees of about $50, and a back-end fee of about 20% or 30% of the amount “saved” for clients in a settlement.

Debt settlement companies generally advise their clients to make monthly payments into a special account instead of paying creditors. The companies promise to use the accumulated cash to settle debts for pennies on the dollar. But in the meantime, creditors aren’t getting any payment, so interest and late fees accrue, debt rises and consumers get a steady stream of calls from creditors and collection agencies. They may even be sued and have their wages garnished.

Consumers in debt-settlement plans often see their credit scores tank. While they’re not making payments, of course, their scores will drop. But settling a debt for less than the amount owed is also “a serious negative on your credit score” and stays on your credit report for seven years, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which developed the widely used FICO credit score.

Debt settlement can also increase a consumers’ tax bill since income tax must generally be paid on the amount of debt forgiven in a settlement.

A recent Wall Street Journal article on debt settlement companies told the story of several consumers with high credit card debt who thought they were doing the right thing by signing up to work with debt settlement companies. However, instead of things getting better, they got much worse for these people. The harassing phone calls from bill collectors increased, followed by law suits being filed by the credit card companies who then garnished their pay checks, all of this causing their credit scores to plummet. One of the profiled consumers wrapped things up by saying “I wish I had filed bankruptcy to begin with. I’d have been much better off.”

Be sure to read my two other recent posts on debt settlement companies: “The Truth About Debt Settlement Companies in Oklahoma” and “5 More Reasons to Avoid Debt Settlement Companies.”

If you are struggling with debt problems and being harassed by bill collectors and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation. I would count it a privilege to be able to visit with you in a relaxed and confidential environment where I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.