If your phone keeps ringing off the hook from creditors clamoring to be paid and ads screaming "Get out of debt today!" begin to sound good, you might be pondering debt settlement and debt consolidation as possible solutions to your troubles.
In debt settlement and debt consolidation, you combine your debts and pay only a portion of the total. But before you sign up, consider these promises that debt settlement companies can't keep.
1. 'Satisfy your debt for cents on the dollar.'It's difficult to make and keep that promise without knowing the details of how much money you owe, how long you've owed that money and to which creditors, says Gail Cunningham, spokeswoman of the Silver Spring, Md.-based National Foundation for Credit Counseling.
"They don't know your past payment history. They don't know which issuer you owe," she says. "Each person has different assets that can be used to satisfy the debt. ... You can't make a blanket statement."
2. 'We guarantee you'll be debt-free in three months.'Again, the company does not know who or how much you owe. Some obligations, such as back taxes, student loans and child support can't be covered in a debt settlement plan, Cunningham says.
3. 'You can't get help without paying an upfront deposit or fee.'Some debt settlement companies may accept an upfront fee of as little as $50, says Jessica Cecere, president of the Consumer Credit Counseling Service of Palm Beach County and the Treasure Coast in Florida.
But typically, the debtor pays the debt settlement company a percentage of the debt owed -- often 15 percent -- for negotiating the debt, Cunningham says.
The firm negotiates a payment between you and creditors and accumulates enough money to make that payment. "The debt settlement company will hold the money until you reach the settlement amount," she says. "Meantime, your creditors aren't being paid."
While you're accumulating that payment, "you're not paying your bills and you're getting further and further into debt," Cecere says.
Instead, go to a nonprofit credit counseling firm that might charge you only $20, if anything, Cunningham says. Instead of billing the debtor, these counselors often get what's called a fair-share percentage payment from your creditors after you've paid.
4. 'We'll handle everything. You should cease communication with your creditors.'Although the idea of not talking to or opening mail from creditors sounds like a load off your mind, it's your debt and your credit score, Cunningham says. Don't send in a change-of-address form directing all creditor mail to a debt settlement company, she says.
"Remember the creditor is the one with whom you have a contractual agreement," she says. "When all of your statements are going to the debt settlement company, you don't know how much in interest and late fees are being added on. You also don't know if your debt has been moved into collection."
Finally, if you think you need debt settlement, try debt management first, Cecere recommends. Contact your creditors and ask for reduced interest, suspended payment or more favorable payment terms.
"It's real important just to call and say, 'Hey I can't make this payment. I'd like to work something out,'" Cecere says.
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