Chapter 7 - Solutions for a Financial Crisis

You’ve seen ads for debt settlement or debt relief, and their promises sound intriguing. But as with any great offer, you need to approach their claims with skepticism. As the old saying goes, if something seems to good to be true, it probably is.

And debt settlement is no exception. A recent post at The Consumerist titled “Confessions of a Debt Settlement” worker cracked open the door of this tightly-sealed group of agents, providing an invaluable look into this growing industry and the ways that it “helps” its customers.

Debt settlement companies often advertise as an alternative to bankruptcy, claiming that they can drastically reduce credit card debt without the legal entanglements and long-term consequences of bankruptcy. The anonymous author of the Consumerist article worked for a company that touted its ability to negotiate with creditors to reduce clients’ payments by 50%.

Of course, there’s always a catch.

Did You Read the Fine Print?

It’s never a good idea to sign a contract without reading the fine print, but when it comes to financial decisions, you can face devastating ruin if you aren’t careful. Just take the example of the recent housing crisis: many subprime borrowers took out adjustable-rate mortgage loans or other sophisticated financial tools, only learning after the fact—some during foreclosure— that the fine print in their contracts differed greatly from what their brokers or lenders had led them to believe.

The anonymous Consumerist author describes the contracts that he had debt settlement clients sign, typically without calling attention to any of these questionable terms:

• The company was not responsible for any damage to clients’ credit scores;
• The company could cancel a client at any time without providing a refund;
• Any client who cancelled his services was still obligated to pay in full for the services;
• Money for payments was taken directly from clients’ checking accounts;
• The company did not interfere with creditor/client relationships; and
• The company did not encourage clients to stop making payments on debts owed.

Of course, many of these terms were couched in legal language that was made to be as complex as possible to prevent easy understanding.

Of course, it’s not illegal to write complex contracts. However, the sales team’s practices behind closed doors support the idea that the company would do anything to confuse or outright deceive a client in order to get them to sign, then leave them unable to back out because of the fine print. The author recounts how agents would blatantly lie about the terms of the contracts in order to gain the bonuses associated with signing on new clients.

The Truth about Debt “Settlement”

Broadly looking at the promise of debt settlement in itself, the luster of the advertising promises lose their appeal as you begin to examine the facts. Like the anonymous author’s company, many debt settlement agencies promise to reduce debt by as much as 50%.

The author of the article noted that many clients were told to stop paying their creditors because the debt settlement agents could not negotiate better terms with creditors unless certain accounts were in default. Effectively, the agents told clients to put themselves into a worse financial situation so that they could help themselves.

The result of these dubious tactics?

By the time the agency had negotiated a 50% payment, many clients owed twice as much, and so ended up paying what they originally owed – plus fees for the service!

These clients also experienced the other negative consequences of massive debt, including lowered credit reports, liens on property, and wage garnishment. All in all, the consequences of entrusting financial security to a debt settlement company were devastating.

This anonymous author’s report confirms what many in the mainstream media have been suggesting for some time from the outside of the industry. An MSN article examining the practices and costs of some debt settlement companies found that fees for debt settlement services can total thousands of dollars – in many cases, more than a debtor would have paid a lawyer for financial advice and help.

Alternatives that Work

If you’re struggling with debt, there are options available. A lawyer can seem like an impossibly expensive aid, but when you consider the cost of the deception offered by debt settlement companies, you may see this in a different light.

To arrange for a free consultation with a bankruptcy lawyer, fill out this online form today. You can discuss filing for bankruptcy, working with a credit counseling service, negotiating lower payments with creditors and doing much more.