Debt Settlement Program: 5 Reasons to Be Wary

[May 8, 2009.]

 

Debt consolidation. Debt settlement. Debt elimination. Consumers on the hunt for relief from mounting credit card bills are often confused by these programs. But it’s critical to know the difference, as there are serious financial implications associated with each. Here’s a quick rundown of what to be on the lookout for when soliciting assistance from third-party entities.

1. Debt consolidation programs are never free. Despite that attractive handbill claiming feeless consolidation, there is almost always a premium for the provider. Transaction fees are the most common way that lenders get a return on their investments. However, inflated percentage rates, extended repayment periods or prepayment penalties are not uncommon addendums to the deal.

2.  Consolidation does not equal settlement. Some companies or consumers will use the terms interchangeably, and that just isn’t the case. Consolidation combines all of your debts into a single account and refigures the annual percentage rate and minimum monthly payment. Settlement typically forgives a certain percentage of your debt along with a notation in your credit file. The difference here is huge. While consolidation may take years to repay, the mark on your credit from a settlement can be tough to overcome.

3. Caveat emptor. Let the buyer beware. Case in point--the LA Times recently ran an article on the investigation of debt settlement firms for unscrupulous business practices American Financial Service of Bakersfield, Debtmerica Relief of Santa Ana, Freedom Debt Relief of San Mateo, New Horizons Debt Relief of Aliso Viejo and U.S. Financial Management of San Diego are all under a cloud of suspicion for leaving consumers in worse financial shape than before.

4. Debt settlement can be done individually. There’s really no need to buy these services, and there are many web sites out there to help you. The NY Times explains that contacting credit card companies and offering a lump sum payment is usually enough to get them to work with you, although you may be responsible for taxes on the amount forgiven.

5. Consumer advocate groups exits to educate and advise. For example, the National Association of Consumer Advocates offers resources and personnel to assist consumers in making informed decisions. Topics include debt, identity theft, lemon laws, predatory lending and military consumer rights.

For more information on the differences between debt consolidation and debt settlement programs, the better Business Bureau is another trusted source. It provides information on debt negotiation and trusted lenders that can make the process easier.

 

About Author:

Kelly Richardson is a freelance writer, marcomm consultant and digital entrepreneur. He’s written content for Fortune 500s Google, Yahoo!, Microsoft and Wells Fargo. Find out more about him at kellyrichardsoncopywriting.com.