Debt Settlement

Debt settlement, a process in which a consumer who is behind in debt payments negotiates with the creditor to pay off the debt in full for less than the amount owed, has become a big business as American consumers struggle with historic levels of unsecured debt. Problems arise when a consumer pays a debt-settlement company to do the negotiations and make the payments. A recent investigation by U.S. Government Accountability Office (GAO) found that some debt-settlement companies engage in unscrupulous activities. (Its report, GAO-10-593T entitled Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers and dated April 22, 2010, can be found online at www.gao.gov by searching for its number.) These included:

  • Charging fees before settling any debts
  • Applying monthly payments to fees before reserving them for debt settlement
  • Advertising that their services were linked to government programs
  • Offering $100 if they could not get a consumer out of debt in 24 hours
  • Claiming high success rates, up to 100 percent
  • Suggesting that consumers stop paying on their debts

You can avoid being scammed when seeking help with debt settlement by doing your homework and shopping around. Consider several companies. Check them out with the Better Business Bureau. Go on the Internet and see what people are saying about them. Find out how long they have been in business and whether any legal actions are pending against them. Ask about their services and fees.

You should also consider debt consolidation, credit counseling, and doing it yourself. The first is a process in which a consumer takes out a load to combine debts into one payment, typically smaller and at a lower interest rate than the individual debts. In the second a consumer receives credit counseling and assistance in managing finances, budgeting, and debt consolidation without a loan. The third involves the following:

  • List your goals.
  • List your expenses and see which ones you can reduce or eliminate.
  • Call your creditors to request a lower interest rate. Do this before your debts are assigned to a collection agency.
  • Put as much money as possible to reducing your debt, and keep doing it until all your debts are paid off.
  • Sell any stuff you don’t use to make extra money.