Over the past few years debt settlement has been in the news, and not always in a good way. Many consumers have complained about the services they’ve received while others have been very happy. Much of the disparity in the perception of the service is due to misconceptions about the process itself.
So here are the top ten misconceptions I see out here on the front lines of the debt settlement industry.
1. “We’ll Stop All the Collection Calls.” Some debt settlement companies say they can stop collection calls by sending a letter. What they are referring to is sending the company a cease & desist communication letter to stop the collector from calling. But that letter only applies to third-party collection companies and has no power to stop the original creditor that you owe the debt to from calling. In fact, sending the letter and cutting off all communications can lead to you getting sued faster because the only route of communication left will be through the court. The original creditor, who the cease & desist letter has no power over, may just send your account to legal when they get the letter because they don’t want to hassle with the debt settlement.
2. “We Will Take Over and Work With Your Creditors. You Won’t Have to Do a Thing.” When you took out the loan or credit, you signed an agreement with the creditor. The debt settlement company was not a party to that agreement and has no authority to intervene between you and the lender. The debt settlement company is providing a service on your behalf, and while you may give them permission to talk to the creditor, if the creditor does not want to deal with them—they don’t have to. Your creditor may have a policy against working with a debt settlement company. There is nothing that requires them to do so.
3. “We Will Make Your Creditor Accept Less Than You Owe.” A creditor does not accept a settlement because it makes the most sense—they accept a settlement only if the creditor’s policies and procedures allow the department you are communicating with to accept it. Some creditors are more receptive to settling for less than others. Without the assistance of a debt settlement company who is familiar with the current polices of a particular creditor, you don’t know if you’re getting a good deal.
4. “Don’t Worry. Debt Settlement Will Not Hurt Your Credit.” Creditors don’t entertain offers from people who are current on their bills. Typically ca creditors polices and procedures require the borrower to go 90+ days past due before they can offer a reduced pay off amount to satisfy the debt. During that time, payments are typically made to the debt settlement company assigned escrow account and not the creditor. This means you are electing to not pay the creditor and that makes them agitated. By not paying your creditor, you will be in default of your agreement and the creditor will begin to add late fees, higher interest and penalties to your balance owed. Your balance will grow larger. Your account will be moved into the collection queue, will be reported to the credit bureaus for lack of payment, and the creditor may sue you and attempt to garnish your wages. Debt settlement is not a process without risks and penalties.
[Resource: 11 Ways A Debt Collector May Be Breaking the Law]
5. “Once You Pay the Settlement You Never Have to Worry About The Debt Again.” Not so fast. Unless you get the agreement to accept less than the full balance as payment in full in writing from your creditor — and you keep a record of them receiving your settlement payments, it can come back to haunt you. It is not unusual for a creditor to claim years later that they never agreed to accept less than the full balance to satisfy the debt years later. The only thing that is going to get you out of that is proof of the offer and proof they received the payment. Be sure you make that settlement payment by some traceable means, like a draft from your bank or by check. Keep copies of bank statements or cashed checks with the settlement offer in a safe place with your other important papers.
Image by iDanSimpson, via Flickr