The other day I had a quick chat with a client who was contemplating enrolling in a debt settlement program. The debt settlement industry has a bad reputation due to unscrupulous companies who were not delivering on their services, overpromising, and charging outrageous fees. This was one of the main triggers for the FTC step in and amend their "Telemarketing Sales Rule" which prohibits debt settlement companies to charge upfront fees before settling a debt.
As I got a little more information from the client, I soon realized that he wasn't the best fit for a debt settlement program. He had about $15,000 in credit card debt, was one month behind on payment, and had two cars that were completely paid off.
He advised me that the company he was talking to was an "attorney backed" company and offered a money back guarantee. It might seem like a pretty strong selling point with nothing to lose, but there are hidden dangers associated with his specific situation.
First and foremost, just because a company is attorney backed does not mean that an actual attorney will be negotiating their debts. This simply means that a company is piggybacking off their license to charge a retainer fee or a monthly maintenance fee. It gives a false sense of security that an attorney will represent you and back all your problems, making them magically go away.
This is not true. Rarely does an attorney talk directly with your creditors. Think about it: Their time is valuable and they can't spend hours on the phones talking to your creditors -- instead they hire paralegals or salespeople to do the leg work for them.
There are major setbacks when going through a debt settlement program. Besides the obvious fact that your credit score will be ruined, there's a possibility that your creditors might sue you and garnish your wages. You will also be liable for taxes on any debt forgiven over $600. The reality is that most debt settlement programs fail because companies are not screening their clients.
Some of these attorney backed companies might tell you that they will represent you in court if you get a court summons but this isn't free. They will usually charge you a retainer fee to show up in court, and even if they do, there's no magic formula they have to make everything better. Instead, they might advise you to file for bankruptcy. Seems like a great way to monetize on a client, right?
By no means am I saying that debt settlement programs are bad. In fact, I think debt settlement is an effective approach to debt relief for those who are fit for it. The problem with most companies is that they do a poor job screening their clients to pick the best ones who can graduate from the program.
If you're thinking about enrolling in a debt settlement program, make sure you research all your other options and take a second look at your budget. A quick fix in your spending could give you the extra cash flow you need every month to pay off your creditors. SpringCoin will help you choose the right program and give you personalized spending insights to get your finances back in order.