Debt Settlement Companies: Throwing Good Money After Bad
Debt settlement, debt consolidation and debt negotiation companies have proliferated into a ubiquitous fixture in radio advertisements, television commercials, and billboard ads. These companies offer to eliminate consumers' debts by negotiating settlements for less than the full balance owing or for structured payments over time. Consumers are often attracted to these offers out of a desire to avoid bankruptcy. However, the problem is that these companies often take the last bit of a consumer's money before the consumer is forced to file bankruptcy anyway. By then, their credit has been damaged worse than the bankruptcy alone would have caused.
Typically, a debt consolidation company instructs a consumer to stop paying their bills, and instead to pay the money into an account controlled by the company. This throws the consumer's accounts into default status and starts the process of collection and charge off. This results in delinquencies appearing on the person's credit reports, and causes collection efforts, such as collection calls and letters. The creditors may also refer the account to an outside collection agency. Once the accounts are in delinquent or default status, the debt negotiation company may get involved, by trying to negotiate a payment plan, or a reduced settlement. The problem is that this is a house of cards, and one that creditors have gotten wise to.
For example, a consumer may have five credit cards. The debt settlement company may negotiate very favorable settlements with the first four creditors, but once the fifth credit knows that a debt consolidation company is involved, the last creditor can wait until the lion's share of the consumer's debt is settled. Then, the last creditor can sweep in and demand full payment, or just refuse to strike a deal. That last creditor can get all of the remaining money, or may not be willing to settle at all. Now that the consumer's debt is reduced with the other four companies, that the final creditor has no incentive to take less than the full amount owed. This is all the more acute if all five of the creditors are staring one another down. The result is that the consumer may end up with delinquencies, charge offs, and collections on their credit report, and still have to file for bankruptcy.
It is true that bankruptcy will have a significant negative impact upon one's credit rating. However, it is a one-time event that effectively draws a "line in the sand" and allows the debtor to hit the reset button. Once all of the dischargeable debts are eliminated, the consumer can start rebuilding his or her good credit. Instead of paying money to a debt settlement company, the consumer can go back to paying priority bills, like mortgage payments and car loans. After about two years, the effect of the bankruptcy will be greatly diminished, and consumers will be able to obtain conventional credit again. A good measure of whether bankruptcy is a good options is to consider whether the debtor will reasonably expect to pay off all of the debts which would be dischargeable in bankruptcy within two years. If the answer is yes, then bankruptcy may be avoided. However, if the debtor is resting their hopes on the debt consolidation company's house of cards, bankruptcy may be a much better option.