While there are many options available for anyone who wants to wipe away their debts, all these options have their costs. If you do it yourself by living frugally and making sacrifices, you’ll get the best rewards by learning better financial habits, but it may not be easy until you get into the habit of living with a new fiscal diet. If you involve others — by inviting advisors, third party agents or companies in the picture — the cost is this: the dependence on someone else to resolve your problem (in many cases, it’s something you can work on yourself) and of course, there are fees you’d have to fork out for this help. Also, there’s the risk that some of these debt relief companies are going to give you minimal help for the money you pay; note that many debtors end up not making much headway with their debt problems when they end up signing with the wrong “professionals”.
If you are leaning towards settling your debt, then make sure you understand what this entails. I read in a few publications that debt settlement is not really right for most people — it’s considered a “niche solution” for those heavily in debt and may be best for those who are already contemplating bankruptcy as a way out. To help you make a decision about how to deal with your debt, I compiled some pros and cons to shed light on this particular debt reduction solution:
Debt Settlement Pros
What attracts a lot of people to debt settlement companies and debt relief programs? Well, who doesn’t want to get the “debt monkey off their back” as effectively as possible? Settling your debt is one way to make it all go away. If you’re so sick of your debt, are ready to move on, and are willing to face the costs involved, then this could be a solution. After all, your creditors would prefer that you give them something rather than nothing, so they’re likely to work out an arrangement with you. With debt settlement arrangements, much of your outstanding debt is forgiven through negotiations. Here are the pros and positive reasons for formally settling your debt:
- You could be completely free of debt within 24 to 36 months so you can start rebuilding your credit.
- You may be able to satisfy your debts for far less than you actually owe, representing a typical savings of 50% to 60% or more.
- Some creditors may agree to re-age your accounts and bring them to a current status in order to boost your credit score right away (especially since your credit is probably not in good standing up to this point).
- All unsecured debts and medical bills in excess of $1,000 can be included in debt settlement arrangements.
- You can protect your credit report from incurring negative marks after you make settlement arrangements with your creditors. That is, you may be able to negotiate with and convince some creditors to go easy on the impact on your credit score going forward.
- In most instances, your settled debts will no longer be subject to legal action or collection pursuits, so you don’t have to worry about debt collectors hounding you.
- You have more disposable cash to pay for utilities, housing, insurance and food. This may also help you free up more funds for high priority needs.
- You can finally reset your financial life.
Should you get the debt monkey off your back by settling your debt?
Debt Settlement Cons
For the peace of mind that comes with releasing yourself from the weight of debt, there are of course the tradeoffs. There’s no real easy way to release yourself from debt — there’s always a cost to dealing with a third party or company in the debt industry. Now that we’ve explored the good points of debt settlement, let’s review the cons and areas of concern:
- Entering a debt settlement arrangement will require you to stop paying your creditors directly. You’ll then be asked to route your payments to the debt settlement company, to get the ball rolling. Your credit will take a hit when you “pay by settlement”, as this will appear on your credit report. But if you already have bad credit, then this will probably be less of an issue. But be aware that negative marks will continue to hit your credit until settlement payments are started, while the settlement company waits for money to build in your account.
- Debt settlement companies often charge you an upfront fee plus monthly fee, and will wait to pay your creditors until enough money builds in your settlement account so you can proceed to settle.
- You may end up paying less to your creditor (who’ll agree to settle for less on your debt), but you’ll also end up paying a portion of your debts to your settlement company. So some of the money intended for creditors will instead find their way as payments to your settlement company for services rendered. So how much of your money are you simply rerouting to a different entity? Here’s where a cost/benefit analysis may prove valuable and may influence the decision you make.
- Debt settlement applies to unsecured loans only so it can’t be used to help you pay off a car loan, mortgage or other secure loan.
- Your forgiven debt won’t really be forgotten because you’ll owe taxes on it. The debt you settle will trigger a tax: forgiven debt becomes taxable income and will need to be reported as such. As you can see, there’s no escaping the “tax man”. If you’re so deep in the hole, the tax you end up owing may put you in even bigger trouble.
- Some creditors won’t work with debt settlement companies and may even treat you more harshly if you use such third party services.
- Debts appear on your credit report as “settled” instead of “paid in full” unless the terms are clearly negotiated with creditors.
- Collectors can sell the remaining debt to another collection agency if your creditor does not send you a written notice as proof that your debt has been forgiven. You’ll need to keep a record of the outstanding debts you still owe.
- Debt settlement companies are only allowed to operate in certain states.
- The debt settlement industry suffers a stigma due to the questionable practices of some companies in this field. There are, however, legitimate companies that work hard to uphold their reputation. Before you work with a debt settlement company, make sure you do your due diligence.
So Is Debt Settlement For You?
I think that each type of debt solution serves a certain market. What’s important is that you find the right solution for your particular situation. If your debt situation has become too unwieldy that you can no longer handle things on your own, then go ahead and explore debt counseling or other channels that are available to you. But make sure you are careful about the debt services and companies you deal with as this industry is vulnerable to abuse.
Debt settlement seems to be more of a last resort for those steeped in debt. It could be the solution to take if you want to avoid bankruptcy and are committed to developing a clear plan to start over with a clean slate.
Created September 8, 2009. Updated December 22, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.
{ 30 comments… read them below or add one }
Informative article. How can someone check the credibility of a debt solution company?
Choosing to work with a debt settlement company really doesn’t guarantee you peace of mind or the assurance that your debt “will just go away.”
Most debt settlement companies advise you to immediately stop making payments to any of your creditors; instead, they direct you to make payments to a special account they establish for you, and when the balance in that account reaches a certain point, they will then use the money to pay creditors.
However, your creditors don’t give two hoots about your special account, have no reason to wait until it’s convenient for you to pay them and won’t stop collection calls or even a lawsuit to collect what you owe them.
The debt settlement industry is plagued by problems and unscrupulous people looking to take your money without delivering what they promise.
IMO, steer clear.
I realize there are those who will have a negative response to debt settlement as an avenue for debt reduction. And I can see why! It is unfortunate that the more vulnerable someone is financially, the more likely they go deeper in the hole because companies and other people take advantage of their weaknesses.
This pattern is so apparent in many industries and you can see that our nation is where it is today because of the collective actions and practices of countless members across many corners of the financial sector. So where are the regulatory bodies in all these?
So after I wrote about this article, I received a message from someone who pointed out the existence of the “Association of Settlement Companies (TASC)” whom he says “is working hard to clean up the image of the debt settlement industry.” Here is the site for TASC. (@Mahmood, I’d check this site to get more information on the debt settlement industry and those that belong in it.)
I’d love to know if anyone has heard of this organization and if you have any experience with the debt settlement process.
I had over $30,000 in credit card debt and I was miserable. I finally decided to get my life in order so I did some research on debt settlement companies… and guys before you do that I HIGHLY recommend doing the research because they are not all legit or at least don’t do all what they promise to do.
However I did find one that worked for me. They were great and gave me a free consultation and talked to my creditors and literally cut my debts in half. I know how it feels to always be ducking phone calls and not even bothering to open half your mail. I would recommend checking out such companies if you are in serious debt and want to take control of your life.
You can rely on SOME debt settlement companies when in debt. I have experience with this. I was swimming in debt and when I relied on a trustworthy company, I got 50-60 % knocked off. Anyways, thanks for this post!
@Sarah & I Want To Reduce My Debt – which debt settlement company did you use?
I hate debt that’s why i have dedicated myself to helping people write it off – FOR no fee! There is no good debt or bad debt. NO debt is best. Discuss!
You offer some wide ranging advice that I think anyone should find valuable.
I would suggest that for those interested in DIY Debt Reduction should start by becoming familiar with the law. The Fair Debt Collection Practices Act is the main piece of Federal legislation that applies to fair debt collection. In addition, people should also become familiar with their local state laws too.
Hello SVB
Great Post, I will just add a bit to your question about Tasc.
In my opinion, TASC is not doing a great job protecting consumers. Tasc is not much more than a lobby organization for their member settlement companies. It is unfortunate that most of these debt settlement companies are nothing more than vultures picking what is left of a consumer’s financial disaster.
Consumers need to use extreme caution if they feel they have the need to hire a debt settlement company. Debt settlement as a financial concept actually can make good sense in certain situations, but the canned, high fee, bad service, one size fits all type of approach that Debt Settlement companies use is not a wise financial move.
As I said, Tasc is basically a trade organization. I do agree with many of the things that they do, but they are not the be all, end all authority when it comes to protecting consumers from bad debt settlement companies. Again, I don’t think everything that tasc does it bad, I just think they don’t do enough and for obvious reasons. If you look at the board of directors for tasc, you will find that almost all of the members are either owners of debt settlement companies or closely associated with a company or companies. So of course it wouldn’t be in their best interest to have Tasc do anything to significantly hurt the bottom line of their own companies. Tasc does not try to regulate fees that settlement companies charge or when they charge them.
A company can charge a consumer 20% of their debt up front as a fee and as long as they disclose that to the consumer, then they can be a member of tasc. Tasc doesn’t set standards for the success rate of companies. Case in point, Credit Solutions (a tasc member) and self proclaimed largest settlement company was recently sued in NY by the attorney General. During the lawsuit it was revealed that of the 18,000 NY residents enrolled into this program over the last 5 years, less than 2,000 successfully had their debts settled. That is a Success Rate of 11%!!! Anyone else want to jump into this program?
Some more fun facts about Credit Solutions- Credit Solutions is recognized by the American Business Awards for the “Best Customer Services Department in Financial Services” and is a platinum-level member of the International Association of Professional Debt Arbitrators and a charter policy partner of the United States Organization for Bankruptcy Alternatives (USOBA).
So they have all the badges on their website, are high level members in all of the organizations that consumers are led to believe are looking out for them and they have a success rate in New York of only 11%. Hmm is anyone looking out for consumers?
Tasc does do some good things like requiring companies to fully disclose the damage that debt settlement can do, but in my opinion does not go far enough to protect consumers. Now in their defense, they are not a consumer advocate organization. They are a trade organization, that lobbies on behalf of their member companies. (Which pay yearly dues to tasc).
The problem stems from the gross misrepresentation by debt settlement sales people. They jump up and down all over the fact that they are a member of tasc so the consumer can sleep well at night knowing that they are a great company when in fact tasc really has nothing to do with their fees, their customer service, or their success rate.
As a final note, Andrew Cuomo, the NY Attorney General is currently investigating and has Subpoenaed 14 debt settlement companies as part of a broader investigation into the debt settlement industry. Out of the 14 companies being investigated for false, deceptive and misleading practices, at least 9 of them are members of tasc, and 8 out of those 9 are actually “accredited members” of tasc.
So if you are a consumer in debt and you are seeking assistance from a debt settlement company and you are told not to worry because Tasc has given us their stamp of approval. Please smile, thank the nice salesperson for the information and do your own research on the company. I can promise you that it will likely save you thousands of dollars and many sleepless nights.
@Damon,
I appreciate the humongous comment. That’s a lot to digest, but definitely some good information. Thanks for sharing this with us!
Ha ha, your welcome. I didn’t mean to make it so long but it just sort of kept going. I should have just turned it into a blog post about tasc. Hey there is an idea. Maybe I will put that on my to do later in the week. Since I get that question from consumers quite often. Hope the info will help your readers.
@Damon,
Hey that’s great! If you do have that post up, come by here and share your link with us. I do think that we should all get the whole story about the debt settlement industry, both pros and cons. Your information has been helpful. I would like to get an insider’s view of this stuff if possible. 😉
Ok, I am now following you on twitter, give me a few days to put the post together and I will let you know when it goes live. Thanks for letting me share.
Hello SVB,
Here is the link to the post that I have on TASC. There is so much information that I have had to turn it into a mini series of 5 posts. Here is the first one announcing the series. I have 4 more posts that I have linked back to this original one.
Consumers that consider enrolling into a debt settlement program should really do their homework before making a final decision. Hope this info will be of value to them.
Debt settlement companies are not all equal. Some are just flat out better than others and consistently prove that they can settle debts better than their competition.
Before I used an agency, I think it best to call your creditors and tell them your situation and ask what they can do to help you. At the end of the day, you made the decision to make the purchases. What I do not condone is the outrageous finance charges.
If they will not work with you, then it is time to go forward with another plan.
I am more inclined to try out debt settlement for the chief reason that life becomes much simpler and for some reason you wake up happier knowing that you don’t belong to a faceless heartless corporation that can and do whimsically change interest rates on you.
Whenever we deal with a company in the credit or debt industry, we need to be prepared for the costs. Unfortunately, if you’re ever remiss in dealing with your personal finances, you can expect to pay even more to fix the problem. Therefore, it’s always best to be on top of your finances before it gets to the point that it needs fixing. Also, DIY remedies are best and cheapest. If consumers just learned to stop spending so much and so impulsively, it would be a step in the right direction.
I think it’s important also to separate out the idea of debt settlement, from debt management plans. You can even do debt settlement yourself for free, by negotiating directly with creditors to see if they’ll accept less than the full amount if you pay off in a lump sum or very accelerated payments. Credit counselors will negotiate for you too, of course, for a percentage.
A debt management plan can be a cash cow for credit counseling companies, so they have an incentive to push you into one whether it’s necessary or not. That’s where you get into making monthly payments to the credit repair company, which they then hold onto while negotiating with creditors, then begin disbursing while taking a percentage themselves.
Not that debt management plans are always bad. There are reasonably inexpensive, non-profit credit counselors who also offer debt management plans, if you like the discipline of having a place to send payments to each month, or if you’ve had no luck getting creditors to trust that you’ll make accelerated payments on your own.
Obviously, the best way to deal with this issue is to be responsible and not find yourself in this situation. If you do, however, honesty and integrity should be at the top of the heap. Be honest with your creditors when working out a payment plan, and make sure you don’t commit to something you can’t follow through. Some refinance their mortgage to “consolidate” the debt: remember, if you do this you will be paying off the debt for 30 years- not a good idea. Credit card companies are in a very competitive field — call them to negotiate your rate — it can be done. See my blog article, to bone up on what to do before you call… good luck!
In regards to the earlier comment, “debt settlement companies are not all equal.” It’s true that there are a lot of them that just don’t care and then there are the ones that do care. It saddens me to see the companies that really do try and help people have to be penalized because of the bad ones.
Debt settlement can save someone thousands of dollars throughout their loan and can pay off that debt in as little as 2 years with lower payments. This does however hurt your credit, because you have to be behind on your bills or show some sort of hardship in your life for your creditor to settle your debt. This is not a program for everyone, but it does make sense for the majority of people in our country and also because of the state our economy is in.
Hello SVB,
I was recently sent a Cease and Desist Letter from Credit Solutions of America. I wrote an article about it on my blog. I don’t agree with most of what they said, but they asked me to clarify a few things I made in a previous comment here.
I was incorrect in saying that they were members of TASC. They used to be members but are not currently.
The second thing they wanted me to clarify was that I said they had an 11% success rate in New York. I was simply writing what the Attorney General of New York was Alleging in the lawsuit against them. However, they would like me to point out that this fact has not yet been fully adjudicated and the case is ongoing. So at this point, they allegedly have an 11% success rate with clients in New York, according to the AG’s office.
I’m not even 100% confident that debt consolidation will be the right way to go; however I’ve been starting to think more and more concerning this matter, based on what I have been digesting. I could state that eliminating approximately forty % of my financial debt will be a terrific relief.
Even MSNBC reports that in many cases, debt settlement does make sense. We in the industry tend to agree.
Awesome article!
I agree with KT. I’m settling my debts right now and I couldn’t be happier that someone else is dealing with the credit card companies. I’ve had my interest rates increased twice over the last year on two cards for missing one payment. They can pretty much do whatever they want, right? Not anymore! Going with a debt settlement company was the best decision I made with regards to my finances.
Oh, also, from what my debt settlement rep tells me, you don’t have to claim the settled debt difference as taxable income if you are considered “insolvent.” I’d say most people who can’t pay their minimum balance on their cards would be considered insolvent. 🙂
Being an employee of a debt settlement company for so long, I would advice all of you to be honest with your creditors. Debt settlement can save you hard earned dollars throughout the life of the loan and in some cases, you can pay off your debt in as little as 1 to 2 years with lower payments.
Two important factors to consider when searching for a reputable debt settlement program:
1. Seek an experienced program(10+ years in business) that has been settling personal debts and is in good standing with the TASC.
2. Find a program with the fewest amount of customer complaints. They’ll all have complaints – like any business – but read past testimonials. I checked with the BBB for statistics on customer complaints.
Trying to settle your debts isn’t as easy as it sounds. I guess you’d have to ask yourself if you belong to that rather small section of the population that will benefit from this. I think that it’s pretty much like choosing the best of many weak options. So if you’re in this bind, there really aren’t any attractive solutions left, unfortunately.
In regards to the 12-22-2011 update, in the “cons” of debt settlement section you write that debt settlement companies often charge an upfront fee plus a monthly fee. That is not true anymore, or at least it is not so for any settlement company that is abiding by the new FTC regulations put into effect in November, 2010. Those rules state that debt settlement companies cannot charge any fee until they settle a debt, and then that fee must be in proportion to that debt’s amount compared to all of that consumer’s debts that are enrolled in the debt settlement program. The rule is often referred to as the “advance-fee ban”. This protects consumers by having them not have to pay any fee until the settlement company actually “succeeds” by settling each of the consumer’s debts.
The leading debt settlement company national association, AFCC (American Fair Credit Council) (formerly TASC) requires all of it’s members to abide by this ruling, as well as with other requirements in their Code of Conduct. http://www.americanfaircreditcouncil.org is their web site.