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Debt Settlement Companies: What To Know

By: Michael Millington

While there are several methods of debt settlement available, the first thought for many when it comes time to seek a debt relief program is a debt settlement company. There are some important things to know about debt settlement companies which may improve your chances of success when contracting such firms.


Debt Settlement Companies Cannot Charge Upfront Fees

The first thing to note about debt settlement companies is that it’s actually illegal for them to ask for fees up front, at least in some cases. The ban on upfront fees comes from the Federal Trade Commission (who added the ban as a part of the Telemarketing Sales Rule), applying to both firms that use telemarketing and to for-profit firms. In order to seek fees, debt settlement companies must accomplish three key conditions. Firstly, the company has to alter at least one debt the client owes. This means that the company can eliminate your debt outright or, as has been more common, reduce the amount of debt you owe. Secondly, the consumer must actually agree to a written debt settlement or debt management plan. Thirdly, the consumer needs to have made at least one payment related to the newly-settled debt.


With those three points in place, debt settlement companies can ask for full payment. Debt settlement companies can ask for payment without these three points, but the amount can only be “proportional” to a charge for the entire slate being settled similarly. Debt settlement companies are also forbidden from making certain statements about their operations. Though they can require a set-aside or escrow-style account, debt settlement companies can only actually access these funds under certain newly-established conditions. Furthermore, face-to-face sales are exempt from these points, so it may be best to start your search via telephone despite a general preference for face-to-face dealings.


Debt Settlement Can Be Harrowing

It’s also important to note that debt settlement operations can be harrowing. A MarketWatch article referred to debt settlement as “…a high-stakes game of chicken,” often requiring customers to stop paying a creditor directly and instead pay into that set-aside account. This is described as a psychological ploy, with creditors thinking they will eventually end up with nothing and thus are more likely to accept the bailout offer from the debt settlement companies. Having that lump sum in the set-aside account can be a huge plus, with debt settlement companies prepared to offer the account in settlement of the debt and hoping the company in question will take the “better something than nothing” route. Since most debtors would rather avoid bankruptcy (in which case the creditor would get nothing) there’s a greater motivation to take what amounts to a payoff to ignore the full value of the debt.


Do Your Research

It’s also important to note that some debt settlement companies do a better job with certain types of debt than others; a report from The Simple Dollar notes that certain debt settlement companies could be useful for “more niche types of debt” like unsecured business debt. They can even offer help with certain student loans, a generally difficult type of debt to get settled. However, not all settlement companies can do such things. It’s best to research several debt settlement companies to find out what they can do.

There’s a lot to keep in mind when it comes to debt settlement companies, and there are plenty of firms out there eager to get your business. The key point to take away from all this is that it’s important to do the research before going into an agreement with any debt settlement companies. Consider all the alternatives (even the ones that don’t depend on a debt settlement company) before making the final decision. It’s important to be proactive, but a little deliberation in advance can be the kind of thing that saves a lot of headache down the road.


Written by Steve Anderson