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Article 111 Debt Settlement Companies, Don't Settle With Some of Them - Part 2

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Debt settlement companies, how do they usually work? This is part 2 on this issue that started with Part 1 of the same title. Many have had problems dealing with some similar companies to the point that some states even have banned them. So know all about you can before dealing with them.

Normally, the debtor has to pay the debt settlement firm a percentage of the amount owed which is usually around 5%-20%. While deposits you make into the account accumulates enough amount to be able to settle, the company you are dealing with holds the money. The creditors are therefore not paid and you are getting deeper in debt.

Some will tell you to stop talking to the creditors while they say they are negotiating with them and that they will handle everything. It sounds appealing not to have to deal with the creditors by not talking to them or not opening the mail but still it is your credit score and your credit history that will be affected. So do not sign up for a change of address redirecting letters from the creditors to any debt settlement companies.

I know some of you are getting hurt. It is not easy to remember everything we have to do. There is the job to go to that consumes eight hours every day. Then we have to look after the home and family. So all of us really need reminders from time to time. Not only that for there are four steps in the learning process to go through before we can follow instructions.

So to do my good deed, I am going to offer a five-day mini course to remind you of some specific things that will help manage the debt. You can be reminded exactly what to do from day to day and year to year on things we sorely need so we do not forget some essentials.

As a bonus, after the five-day mini course, you will get alerts and tips just in case there are new things you need to know. The most you will get is once a week and you can always unsubscribe anytime. Those who are already subscribed to the alert and tips can unsubscribe so they will not receive it twice or delete one each time. There will be an unsubscribe button at the end of every mail you receive.

It is good to point out that you have a contract with the creditors. And if all communications are redirected to the company, you will not know how much penalties and fees are added to the debt. Meantime the amount of debt grows and there will be letters and calls from debt collectors. There may even be court judgments while you get deeper in debt.             

If one backs out before completing the program, the debt will still be there and will have grown because of the late fees and finance charges. It is difficult to finish the program because it requires a lot of discipline. And the lack of discipline is what brought the debtor in this situation. Not only that, the fact that the first few months of deposits or payments going to the debt settlement companies is a motivation killer.

So debtors should beware of possible pitfalls of signing up with debt settlement companies. I know the ads promising to help sounds like a lifesaver but some of these firms charge upfront fees in the hundreds of dollars and then they do little or nothing to help.

Consumers Union, National Consumer Law Center, Consumer Action and the Consumer Federation of America are some of the watchdog groups that warn those who use any debt settlement companies frequently find themselves deeper in debt. Why? It is because of the hefty fees charged and some hidden fees that are usually paid first long before any debt is eliminated. And these fees are paid whether the debt is settled or not.

Most of those who sign up for debt settlement help, about 60%-89%, drop out within six months and so are unsuccessful in settling their debt. There is really no guarantee the debt will be settled but the full fee will be deducted from the savings account.

Some Possible Harmful Effects of Debt Settlement Service:

  • You will not get help without an upfront fee or a deposit. The fees are hefty although some may accept as low as $50. Insist that the larger fees will be taken out monthly or after the debt has been settled. Better still, do not deal with companies who charge excessive fees and take them upfront. This is money best sent to the creditors.
  • There are no guarantees at any stage of the process. The contract is not legally binding. That is why the firm you are dealing with should be a member of a trade association like TASC which is an acronym for The Association of Settlement Companies. This way you know they adhere to specific standard.
  • The amount of over $600 in settled debt is taxable as the IRS considers this as income from the Discharge of Indebtedness.
  • It could result in a low credit score as reports will say the debt is settled for less than the amount due. Paying off the debts in full looks better on the credit report. And of course, it is the right thing to do.
  • The creditor can still contact the debtor for repayment even if he has a Limited Power of Attorney.
  • It can be dangerous as some creditors could sue you for the balance when they find out your intention. Some could even see their paychecks garnished.

Watch for Part 3 where you will learn how to do it yourself or working with a nonprofit organization. It will also feature the new guidelines for customer protection where the Federal Trade Commission has laid out some new regulations on dealing with debt settlement companies.

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