Problems with Debt Settlement Companies

You’ve probably seen the advertisements—We can help you pay off your debt in as little as 6 months for just pennies on the dollar! If you are like the millions of Americans who are struggling with debt, this may seem like a dream come true—the answers to all your prayers. Unfortunately, it is just that—a hollow promise that can end up costing you thousands of extra dollars and ruin your credit scores in the process. Debt settlement companies are not a dream come true, and sadly, for many Americans—they are a nightmare.

The promise of eliminating your debt and starting over fresh is a tempting idea, especially for consumers who are being hounded by creditors, falling behind on their mortgage payments, or financially underwater. Yet only about one in ten consumers who sign up with these types of debt settlement companies actually end up debt-free like they are promised. The vast majority of them are stuck with outrageous fees, even more entrenched in debt, or even being sued by creditors for defaulting on their outstanding debts.

How Does a Debt Settlement Company Work?

A debt settlement company typically promises to get creditors to lower the amount you owe, in exchange for a lump sum. They do this by requiring consumers to stop paying their bills and instead send money to the debt settlement company to accrue in an account.  The debt settlement company then turns around and offers your creditors a lump sum that is far below what is actually owed. After months of not receiving payments, many creditors consent to this lower payment and a settlement is reached. Yet by encouraging consumers to default on their debts, consumers’ credit scores plummet and some are dragged into litigation as a result.

Problem: Damage to Your Credit Scores

The worst thing you can do when you are struggling with debt is to stop making payments to your creditors. Late payments and defaulted loans are automatically reported to credit bureaus and your credit score will take a nosedive. These late payments and defaulted loans can linger on your credit report for up to 7 years. If your credit score falls too low, you will be unable to secure a car loan, a home loan, or a new credit card without agreeing to pay an insane interest rate. In many circumstances, you may even be outright denied for a loan or a line of credit.

Even if your debt settlement company effectively reaches a settlement with your creditors, they are listed as settled on your credit report and not “Paid in Full”. This is a red flag for many loan companies and credit agencies and can prevent you from obtaining a loan or a line of credit in the future.

Problem: Owing Taxes on Settled Debts

Did you know that the IRS views forgiven debts as income? Yep! As a result, consumers are often hit with a tax bill at the end of the year for the debt that was forgiven. Creditors will send you a 1099-C and you are supposed to report this income on your taxes. Being hit with an unexpected tax bill can be devastating to individuals and families who have just crawled out of debt.

Problem: Paying Themselves First—Not Your Creditors

Many unscrupulous debt settlement companies actually take the money that you pay them and yet never settle a single debt for you. That’s because they take their fees and commissions up front and when consumers begin to struggle making payments, they are left with no money to settle their debts.

To stop these types of predatory consumer practices, the federal government enacted laws to prevent debt settlement companies from charging upfront fees. Companies must now wait to collect their fees and payments until after they settle or reduce the consumer’s credit card or unsecured debt. They must also disclose how long it will take to resolve the consumer’s debt and they must list the negative consequences clearly to the consumer who is seeking debt relief. Yet unfortunately, not all debt settlement companies play by the rules.

Contact Northern Virginia Bankruptcy Attorneys

At Tyler, Bartl & Ramsdell, P.L.C., we realize that there is no easy way to get out of debt. Yet with the help of an experienced Northern Virginia Bankruptcy Attorney, you can get out of debt the right way—while still maintaining good credit scores.

For over 25 years Tyler, Bartl & Ramsdell, P.L.C. has helped thousands of individuals and businesses find freedom from crushing financial debt. Call today for a free consultation at (703) 549-5000 or fill out our confidential contact form.