These days, lots of people are swimming in debt with nowhere to turn, no access to credit, and no liquidity, with their credit scores shot… and they’re wondering what to do next. Someone I know who is in this predicament just recently asked me for some input. I told them that there are various paths to the same end: to get rid of your debt or to reduce it to some extent. I’ve discussed many solutions here, mostly conservative ones that I explore in these articles:
- Get Rid of Your Debt With These Debt Defying Strategies
- How To Get Out of Debt With A Debt Repayment Plan
- Debt Elimination Tips: How To Reduce Debt
- How To Pay Off Credit Card Debt
Now there are several more radical ways and paths to choose to get to a debt free end. Are they worth investigating at all? Aside from do-it-yourself debt reduction methods that involve belt tightening and budgeting, there are methods such as debt counseling or management, debt consolidation and finally debt settlement, which are strategies that people have tried out when things got tough. For those interested in exploring various ways to handle their debt, I offer a list of possible resources to check out below.
Debt Management Resources
In my opinion, doing things on your own is the best approach, but for those who need additional resources or third party assistance in the loan modification, debt counseling and debt settlement and management fields, you can take a look at these services (some of which are free and others, paid):
- National Foundation For Credit Counseling for credit counseling
- Debtor’s Anonymous for providing support and fellowship among recovering debtors
- Debt Consolidation Care for your debt consolidation needs
- Lower My Bills for home refinancing, debt consolidation and debt management
- Home Foreclosure Fighter for loan modification services
- for mortgage refinancing and personal loan needs
I would strongly encourage you to do your due diligence before using any of these services in earnest.
Image from DrDriving.org
Different Debt Reduction Strategies Have Their Costs
While there are many options here for anyone who wants to wipe away their debts, all these options have their costs. If you do it yourself by living frugally and making sacrifices, you’ll get the best rewards by learning better financial habits, but it may not be easy until you get into the habit of living with a new fiscal diet. If you involve others — by inviting advisors, third party agents or companies in the picture — the cost is this: the dependence on someone else to resolve your problem (in many cases, it’s something you can work on yourself) and of course, the potentially big fees you’d have to fork out for this help. Also, there’s the risk that some of these companies are going to give you minimal help for the money you pay; note that many consumers end up not making much headway with their debt problems when they end up signing with the wrong “professionals”.
Debt Settlement Companies: Friend or Foe? Some Pros and Cons
I read in a few publications that debt settlement is not really right for most people — it’s considered a “niche solution” for those heavily in debt and may be best for those who are already contemplating bankruptcy as a way out (check here to find out if you should start worrying about your debt load). I compiled some pros and cons to shed light on this particular debt reduction solution:
Debt Settlement Pros
Settling your debt is one way to make it all go away. If you’re so sick of your debt, are ready to move on, and are willing to face the costs involved, then this could be a solution. After all, your creditors would prefer that you give them something rather than nothing, so they’re likely to work out an arrangement with you. The positives:
- You’ll be debt free within a few years so you can focus on rebuilding your credit.
- You’ll probably be on the hook for much less than what you really owe (perhaps up to 50% or 60% less).
- You may be able to negotiate with and convince some creditors to go easy on the impact on your FICO credit score.
- The debt collectors will soon get off your back.
- You can finally reset your financial life.
Debt Settlement Cons
For the peace of mind that comes with releasing yourself from the weight of debt, there are of course the tradeoffs. And there are many — just check out the downside:
- You’ll have to pay debt settlement companies an upfront fee and possible recurring monthly fees to get the deed done.
- Your credit will take a hit when you “pay by settlement”, as this will appear on your credit report. If you already have bad credit, then this will be less of an issue.
- You may end up paying less to your creditor (who’ll agree to settle for less on your debt), but you’ll also end up paying a portion of your debts to your settlement company.
- Some creditors won’t work with debt settlement companies and may even treat you more harshly if you use such third party services.
- The debt you settle will trigger a tax: forgiven debt that exceeds $600 becomes taxable income! If you’re so deep in the hole, the tax you end up owing may put you in even bigger trouble.
- Debt settlement companies are only allowed to operate in certain states, and many of them are questionable.
After all this, I can only conclude that trying to settle your debts isn’t as easy as it sounds. You’d have to see if you belong to that rather small section of the population that will benefit from this process. But it’s pretty much like choosing the best of many weak options: if you’re in this bind, there really aren’t any attractive solutions left, unfortunately.
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{ 13 comments… read them below or add one }
Choosing to work with a debt settlement company really doesn’t guarantee you peace of mind or the assurance that your debt “will just go away.”
Most debt settlement companies advise you to immediately stop making payments to any of your creditors; instead, they direct you to make payments to a special account they establish for you, and when the balance in that account reaches a certain point, they will then use the money to pay creditors.
However, your creditors don’t give two hoots about your special account, have no reason to wait until it’s convenient for you to pay them and won’t stop collection calls or even a lawsuit to collect what you owe them.
The debt settlement industry is plagued by problems and unscrupulous people looking to take your money without delivering what they promise.
IMO, steer clear. Check this article for more.
I realize there’s an overwhelming negative response to debt settlement as an avenue for debt reduction. And I can see why! It is unfortunate that the more vulnerable someone is financially, the more likely they go deeper in the hole because companies and other people take advantage of their weaknesses.
This pattern is so apparent in many industries and you can see that our nation is where it is today because of the collective actions and practices of countless members across many corners of the financial sector. So where are the regulatory bodies in all these?
So after I wrote about this article, I received a message from someone who pointed out the existence of the “Association of Settlement Companies (TASC)” whom he says “is working hard to clean up the image of the debt settlement industry.” Here is the site for TASC.
I’d love to know if anyone has heard of this organization and if you have any experience with the debt settlement process.
I had over $30,000 in credit card debt and I was miserable. I finally decided to get my life in order so I did some research on debt settlement companies…and guys before you do that I HIGHLY recommend doing the research because they are not all legit or at least don’t all do what they promise to do.
However I did find one that worked for me. They were great and gave me a free consultation and talked to my creditors and literally cut my debts in half. I know how it feels to always be ducking phone calls and not even bothering to open half your mail. I would recommend checking out such companies if you are in serious debt and want to take control of your life.
You can always rely on debt settlement companies when in debt. I have experience with this. I was swimming in debt and when I relied on a trustworthy company I got 50-60 % knocked off. Anyways, thanks for your blog!
Sarah & debt reduction – which debt settlement company did you use?
I hate debt that’s why i have dedicated myself to helping people write it off – FOR no fee! There is no good debt or bad debt. NO debt is best. Discuss!
You offer some wide ranging advice that I think anyone should find valuable.
I would suggest that for those interested in DIY Debt Reduction should start by becoming familiar with the law. The Fair Debt Collection Practices Act is the main piece of Federal legislation that applies to fair debt collection. In addition, people should also become familiar with their local state laws too.
Hello SVB
Great Post, I will just add a bit to your question about Tasc.
In my opinion, TASC is not doing a great job protecting consumers. Tasc is not much more than a lobby organization for their member settlement companies. It is unfortunate that most of these debt settlement companies are nothing more than vultures picking what is left of a consumer’s financial disaster.
Consumers need to use extreme caution if they feel they have the need to hire a debt settlement company. Debt settlement as a financial concept actually can make good sense in certain situations, but the canned, high fee, bad service, one size fits all type of approach that Debt Settlement companies use is not a wise financial move.
As I said, Tasc is basically a trade organization. I do agree with many of the things that they do, but they are not the be all, end all authority when it comes to protecting consumers from bad debt settlement companies. Again, I don’t think everything that tasc does it bad, I just think they don’t do enough and for obvious reasons. If you look at the board of directors for tasc, you will find that almost all of the members are either owners of debt settlement companies or closely associated with a company or companies. So of course it wouldn’t be in their best interest to have Tasc do anything to significantly hurt the bottom line of their own companies. Tasc does not try to regulate fees that settlement companies charge or when they charge them.
A company can charge a consumer 20% of their debt up front as a fee and as long as they disclose that to the consumer, then they can be a member of tasc. Tasc doesn’t set standards for the success rate of companies. Case in point, Credit Solutions (a tasc member) and self proclaimed largest settlement company was recently sued in NY by the attorney General. During the lawsuit it was revealed that of the 18,000 NY residents enrolled into this program over the last 5 years, less than 2,000 successfully had their debts settled.
That is a Success Rate of 11%!!! Anyone else want to jump into this program?
Some more fun facts about Credit Solutions- Credit Solutions is recognized by the American Business Awards for the “Best Customer Services Department in Financial Services” and is a platinum-level member of the International Association of Professional Debt Arbitrators and a charter policy partner of the United States Organization for Bankruptcy Alternatives (USOBA).
So they have all the badges on their website, are high level members in all of the organizations that consumers are led to believe are looking out for them and they have a success rate in New York of only 11%. Hmm is anyone looking out for consumers?
Tasc does do some good things like requiring companies to fully disclose the damage that debt settlement can do, but in my opinion does not go far enough to protect consumers. Now in their defense, they are not a consumer advocate organization. They are a trade organization, that lobbies on behalf of their member companies. (Which pay yearly dues to tasc).
The problem stems from the gross misrepresentation by debt settlement sales people. They jump up and down all over the fact that they are a member of tasc so the consumer can sleep well at night knowing that they are a great company when in fact tasc really has nothing to do with their fees, their customer service, or their success rate.
As a final note, Andrew Cuomo, the NY Attorney General is currently investigating and has Subpoenaed 14 debt settlement companies as part of a broader investigation into the debt settlement industry. Out of the 14 companies being investigated for false, deceptive and misleading practices, at least 9 of them are members of tasc, and 8 out of those 9 are actually “accredited members” of tasc.
So if you are a consumer in debt and you are seeking assistance from a debt settlement company and you are told not to worry because Tasc has given us their stamp of approval. Please smile, thank the nice salesperson for the information and do your own research on the company. I can promise you that it will likely save you thousands of dollars and many sleepless nights.
@Damon,
I appreciate the humongous comment. That’s a lot to digest, but definitely some good information. Thanks for sharing this with us!
Ha ha, your welcome. I didn’t mean to make it so long but it just sort of kept going. I should have just turned it into a blog post about tasc. Hey there is an idea. Maybe I will put that on my to do later in the week. Since I get that question from consumers quite often. Hope the info will help your readers.
@Damon,
Hey that’s great! If you do have that post up, come by here and share your link with us. I do think that we should all get the whole story about the debt settlement industry, both pros and cons. Your information has been helpful. I would like to get an insider’s view of this stuff if possible.
Ok, I am now following you on twitter, give me a few days to put the post together and I will let you know when it goes live. Thanks for letting me share.
Hello SVB,
Here is the link to the post that just went live last night. There was so much information that I had to turn it into a mini series of 5 posts. Here is the first one announcing the series. Over the next week or two, I will complete the other 4 posts and be linking them back to this original one.
Consumers that consider enrolling into a debt settlement program should really do their homework before making a final decision. Hope this info will be of value to them.