Debt Settlement Companies: Scam Or Real?

Debt settlement is attractive to those with huge amounts of debt, especially if that debt has become so cumbersome that they have become unable to make monthly payments.  Debt settlement companies offer relief to consumers by claiming to be able to negotiate with creditors and lower the debtor's debt by as much as 40 to 70 percent. The offered relief gives many debtors a great deal of hope that they might actually be able to get out of debt, but the promise is so tempting it has also caused many to ask if what these debt settlement companies are offering is real or just a scam.

Why Turn To Debt Settlement

Debtors turn to debt settlement companies because they offer to negotiate new terms with their creditors.  Through these negotiations, debtors are promised to have their principal loan amount reduced by 30 to 70 percent. The debt settlement companies also negotiate to decrease the interest rate, sometimes down to zero, while the debtor pays off the balance of his/her loan. The benefits to the debtor are obvious, but there are also potential benefits to the creditor as well.  Creditors have found that when they turn their loans over to collection agencies they receive only a small percentage of the original amount which they loaned out to consumer. When they threaten suit against the consumer, quite often they end up pushing the debtor into bankruptcy, and in this case they run the risk of collecting nothing through the process. Quite often debt settlement companies offer the best possible remedy.  Though they may have to cut the original loan amount in half or even by as much as 70 percent, the creditors are still guaranteed to collect up to 50 percent of the money they were expecting to completely lose.

Warning Signs of Potential Scams

Many of these debt settlement companies do legitimate business, and you can check with the Better Business Bureau to see their ratings and if they have any complaints which were not resolved.  However, there is a lot of money to be made in the debt settlement business and this attracts many who can and will take advantage of your situation.  Watch for the following things when dealing with one of these companies:

  1. Are they offering you savings and reductions which sound too good to be true? If they are offering to reduce your debt by as much as 70 percent, be wary.

  2. Are they letting you set your own monthly payment amount or giving you more than three years to complete the repayment cycle? If they are too eager to get your business and tell you things to ensure that you enlist their services, be wary of them.  They may say anything to get your business because they plan of getting money from you in fees or other unmentioned methods later on.

  3. Be sure they can legally stop your creditors from calling you. If they don't have a legal method of curtailing creditor's phone calls to you, they may send a Cease and Desist letter to them.  This will stop the phone calls but could hasten their filing of a law suit against you.

  4. Ask lots of questions, particularly in regards to their fees.  How are they going to be paid?  Will your debts increase while they negotiate (or wait to negotiate) with your creditors? Will you have to pay extra taxes on amounts that are forgiven by creditors? Will they charge you a percentage of what they save you, or your entire debt amount? Will they allow you to contact people who have been pleased with their services? What rating do they have with the Better Business Bureau?

Seek Legal Assistance

Because the potential to fall prey to a scam is so prevalent in this area, it is highly recommended that in addition to doing your homework you contact an attorney for legal support. Many of the legitimate debt settlement companies are also legal firms, or closely connected; nevertheless, the advice of a trusted attorney can prove to be invaluable.

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