Q: I have enrolled with a debt settlement company. My debts are two and three months behind, which lowered my score before I even started. If I choose to opt out of the program, how in the world do I even start paying back my bills?
A: I’m not a fan of debt settlement. As you are finding out, there are a lot of down sides to such deals.
First, debtors often have to pay a lot of money, cash that could be used to pay down your debts. I’ve seen contracts requiring people to pay several thousand dollars. Debt settlement firms often make claims they can negotiate with your creditors to greatly reduce the amount you owe. Some companies claim that they help reduce your debt anywhere from 30% to 70%.
The companies typically tell people to stop making payments to their creditors, and instead, send payments to the debt negotiation company, where they will hold the money in an account on your behalf so they can make a lump-sum payment offer to your creditors. But, there is no guarantee your creditors will accept the offer. And, while you wait to see what happens, your debts are not being paid, further damaging your credit.
Under a new rule that went into effect last year, debt settlement companies that sell debt settlement and other debt relief services on the phone are banned from charging you a fee before they settle or reduce your debt.
It’s hard to get out of these contracts. But, if the company is not fulfilling its end of the bargain, you may have some options. Here’s a link to a laundry list of things to do, written by consumer advocate Steve Rhode, that may help you get out of the contract.
Before you sign up with a debt settlement company, get a clear idea of what you are getting yourself into. Here are some tips from the Federal Trade Commission.
• Get a clear explanation of price and terms. The company must explain its fees and must tell you about any conditions on its services.
• Find out how long it will take to get results—that is, how many months or years before the company will make an offer to each creditor.
• Make sure the company tells you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.
• If the company asks you to stop making payments to your creditors—or if the program relies on your not making payments—the company must tell you about the possible negative consequences.