When your debt is out of control, it’s important to act quickly and find a solution. One option is debt settlement, which can help you eliminate your debt and pay less overall. But the debt settlement industry has its share of risks and scams. So you might be wondering: Are there dangers of debt settlement firms?
If you’re working with a reputable debt relief attorney, you can rest assured that the answer is no. But if you get mixed up with a fraudulent company, there could be some dangers. So let’s look at the difference and potential red flags to avoid.
What Is a Debt Settlement Company?
A debt settlement company is basically the middleman between you and your creditors. These for-profit companies charge you to reduce, eliminate, or otherwise change the terms of your existing unsecured debt. In most cases, their goal is to get your creditor or debt collector to accept less than the full amount you owe. This is commonly known as a settlement.
How Does Debt Settlement Work?
In most cases, debt settlement is only a possibility if you’re significantly behind on payments. If it appears that you can afford to keep paying off your debt, a creditor will likely not entertain a settlement agreement. On the other hand, if it seems like you don’t have the money to pay your debt in full and you have gone behind in payments, they may decide to settle. A debt settlement ensures that the creditor gets a good portion of the money owed back, and can avoid time and money spent on collections efforts or a lawsuit on behalf of the creditor.
Debt settlement does require skilled negotiation. You can certainly attempt to settle a debt on your own. However, it takes a lot of time and can be stressful. Plus, reworking a deal with your lender or creditor can be a complex process; you don’t want to agree to something you don’t fully understand.
That’s why many people choose to work with a reputable debt relief company, commonly in the form of a debt help attorney. They reach out to creditors on your behalf and explain your financial situation. Then they attempt to negotiate a new repayment plan in which you pay less than originally owed to satisfy the debt. In exchange, the company charges you a fee — either a flat fee or a percentage of your savings.
If a deal is reached, you’ll need to agree to the settlement offer to move forward. That could be a reduced lump-sum payment or monthly payments toward your new debt balance. You aren’t obligated to accept the new deal, however (and your creditors aren’t obligated to accept a settlement, either).
Dangers of Debt Settlement Firms: Red Flags to Watch For
There are many legitimate, licenced debt settlement firms and attorneys who act in your best interest. Unfortunately, there are also a lot of fraudulent debt settlement companies out there. Some will overcharge and underdeliver, while others are outright scams that will take your money with no services provided.
Here are a few tell-tale signs of a debt settlement scam that could put your finances in danger.
Hefty Fees
Even when working with a reputable debt settlement company, it’s typical to pay fees for its services. After all, these are companies that need to make money to keep operating. And often, the fees associated with debt settlement services vary depending on local and state laws.
However, scammy debt settlement firms will charge exorbitant fees. Often, they require a good chunk of that to be paid upfront before any services are performed. These up-front fees can reach upwards of 40% or more of the amount of resolved total debt. Any company that makes you pay a lot of money upfront or before any work is done is likely a scam.
Lack of Communication
When working with a debt settlement professional, it’s important to understand how the debt settlement process will impact your current situation and future finances. A legitimate company will be fully transparent about costs, the status of negotiations with creditors, and other important details.
It’s a major red flag if the debt settlement company keeps you in the dark. If you aren’t made aware of the risks involved or the true cost of your debt settlement plan, you could be getting set up for a scam. If you’re put in contact with many different people within the company, or the work is outsourced, that can also be a red flag that you’re not working with a solid company. people.
They May Not Actually Help Settle Your Debt
One of the biggest risks of pursuing debt settlement is that there is no guarantee your creditors will agree to compromise. Even if they do agree to settle, some creditors will not work with certain debt settlement firms.
Scammers will often make promises about guaranteed results. You continue paying the debt settlement company, assuming they’re working out a deal, when in fact, nothing has been done. This is a worst-case scenario, but it happens. And if it does, you can end up in a more dire situation than when you started, even further behind on debt payments and with much more interest accumulated.
Further, if your debts continue to go unpaid without a resolution, they could be sent to collections. This means that the account is either handed off to an internal collections department or sold to a third-party debt collector. In either case, you’ll be inundated with calls demanding you pay up. But worse, your credit score will take a major hit. Accounts in collections stay on your credit report for seven years.
In this situation, creditors could also decide to sue you in court. If a judgment is secured against you, creditors can take more aggressive measures to collect what you owe. These measures include freezing your bank accounts, garnishing your wages, seizing property, and more.
As you can see, it’s crucial that the debt relief company you hire actively works to resolve your debt and keeps you in the loop about these potential risks. Any definite promises or guarantees of results is a major red flag you want to look out for with debt settlement and debt relief services.
How to Report a Debt Settlement Scam
If you believe you were contacted by a fraudulent debt settlement company, or were the victim of a scam, it’s important to report it so others don’t fall victim as well.
You can report debt relief scams to the Federal Trade Commission (FTC), either online or by calling 800-382-4357. You can contact your state Attorney General’s office. Additionally, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) and Better Business Bureau (BBB).
Work With a Legit Debt Settlement Attorney
If you have unmanageable debt and are interested in settling, it’s important to work with a debt relief attorney. A debt relief attorney can advise you on the best course of action. Debt settlement can be a complex process, so you need an experienced legal professional on your side. Plus, experienced debt relief attorneys often have relationships with creditors’ legal teams. They often know what it takes to secure a deal and protect you from debt collection laws and abuse. At Tayne Law, we advise clients on the best ways to resolve consumer and business debts. These debts include MCA debts, credit card debt, and student loan debt. We have more than two decades of experience as a New York-based, award-winning debt relief firm. And we’ll always work toward a solution that best fits your budget and needs. Learn more about how we can help with debt negotiation by calling us for a free, no-obligation phone consultation at 866-890-7337 or fill out our short contact form. Your information is never shared and all conversations are confidential.
