The beginning of a new year marks the arrival of the first post-holiday credit card statements and the realization for many that they may need to turn to debt settlement negotiators for help, which doesn’t sound like a bad option. But consumers groups are warning credit card users that so-called debt consolidation plans could leave you with more debt – in the form of fees that can run as high as $4,000 for total debt of about $20,000 in the first half of a debt settlement agreement. With this being said, before you commit to anything, doing some research could come in handy, as you’ll have a better understanding of it all. In many debt settlement plans, consumers make monthly payments, usually into a special bank account, until “there is enough to make a lump-sum settlement offer to their creditors,” according to ConsumersUnion.org, the prominent non-profit organization which publishes Consumer Reports.
The debt settlement companies, however, immediately start taking their fees out of this account.
“Saving to try to settle one debt can take a year or more, and since consumers typically have multiple debts, the process can take three or four years,” Consumers Union said in a statement. “However, debt settlement companies usually take out all of their fees, ranging from 14 to 20 percent of the total debt, within the first half of the contract. For debts totaling $20,000, a consumer could pay fees of $2,800 to $4,000.”
Furthermore, there is no guarantee that the debts will be settled. If you are struggling with debt troubles then it would be wise to speak to a someone with expertise in the area. These are great for getting advice and help on debt.
“Debt settlement companies usually collect most or all of their fees from consumers long before they have eliminated any of their debts, and consumers pay these high fees regardless of whether their debts are settled or not,” said Susan Grant, Consumer Federation of America’s director of consumer protection.
The federation – along with Consumers Union and the National Consumer Law Center – has joined up to caution the public of debt relief practices.
The “drop-out rate” for those in debt settlement is high. A study of one company’s customers revealed that 60 percent had cancelled within 5 to 6 months after starting debt settlement, Consumers Union said.
Announced success rates by debt relief companies can be “very misleading” because they may not take into consideration the expense the consumer incurs or the debts that are never settled, the consumer group said.
The Federal Trade Commission has proposed rules that would stop firms from charging fees before they settle the debts. The FTC proposal would also require that debt relief services tp clearly disclose how long it will take to settle debts, and make clear that not all creditors will agree to settle a particular debt.
In addition, nineteen consumer and community organizations have asked the FTC to stop these companies from making claims about results, telling consumers not to pay their creditors, and interfering with communications between creditors and consumers. They also called for a 90-day “money back” cancellation period.
Here are tips from Consumers Union and the other consumer watchdog groups:
- Try to resolve your debt problems with your creditors directly. You may be able to get your interest rate lowered, late charges forgiven, and your monthly payments reduced.
- Contact a non-profit credit counseling service for advice. It may be possible to work out a plan through the credit counseling service to pay off the debts over time. To find the nearest nonprofit credit counseling services, consumers can contact the National Foundation for Credit Counseling, http://www.nfcc.org, 1-800-388-2227 or the Association of Independent Consumer Credit Counseling Agencies, http://www.aiccca.org, 1-866-703-8787.
- Know your rights. Ask your Attorney General’s Office if state law limits the amount or timing of debt settlement fees in your state. Find your state AG at http://www.naag.org.
More helpful information is available at the following sites, in English and Spanish: