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Is debt settlement worth it?

By Jeanine Skowronski · Bankrate.com
Monday, July 21, 2014
Posted: 10 am ET

Do debt settlement firms help struggling consumers?

Not so much, says a new report from the Center for Responsible Lending.

Despite an advance fee ban the Federal Trade Commission issued back in 2010, "we're still seeing that consumers have to settle a lot of their debts in order to come out ahead," says Leslie Parrish, deputy director of research at the Center for Responsible Lending.

Debt settlement firms generally require individuals to default on their debts. As a result, the report argues, a consumer's debt grows via penalty fees and interest rates. Other risks include potential lawsuits and damage to their credit score.

Parrish also says that, unlike with options such as bankruptcy, creditor negotiations and debt management plans, there's no guarantee a customer will ultimately receive financial relief.

"You're hoping they'll get a settlement on your behalf," Parrish says, but "many creditors as a general policy will not negotiate with debt settlement companies."

The report also finds some debt settlement firms are using loose affiliations with law firms to circumvent the FTC's fee ban.

Robert Linderman, vice president of the Executive Board of the American Fair Credit Council, a debt settlement trade association, says the Center for Responsible Lending's report takes "a narrow way of looking" at the industry.

He says legitimate debt settlement firms comply with the FTC's advance fee ban and will only suggest defaulting on debts over alternate options if the customer is poised to or already doing so.

"We accept probably no more than 20 percent of the people who come to us," Linderman says. "Consumers should have the right to choose."

Have you ever used a debt settlement company? Were they able to help with your financial woes? Let us know in the comments below.

Follow me on Twitter: @JeanineSko.

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22 Comments
Terry
July 23, 2014 at 3:32 am

Used them once. Will never do it again. Took the money. Resolved nothing. Bottom line - they made money off of me without settling a thing. Debt was still thee when I fired them. Negotiating with the collection company worked best.

Steve H.
July 23, 2014 at 3:05 am

The worst decision I've made in a long time. I had to pay the company a lot. And, it was ineffective. I was still taken to court and the company didn't back me up. It ruined my credit for 7 years. I'm just now recovering. You have been warned!

Debra
July 22, 2014 at 11:13 pm

I was directed by my mortgage company to use their debt settlement dept. when I was going through a mortgage modification back in 2009. I was not behind on my credit cards, but as soon as I agreed to go through with it, at the advise of the modification rep, because it would look like I was trying to improve my situation for paying my mortgage, I now have learned I was ripped off. Sad to say, 2013 rolls around for tax return time, and I receive a couple of 1099 forms with the total amount of debt I owed on these cards as cancelled debt to report as income on my taxes. So instead of getting a refund in my taxes, I now owe on my taxes which I have never had to do ever. Expensive lesson to learn.

Dan Stanfield
July 22, 2014 at 10:56 pm

As a tax preparer I have had clients come in after using one of these companies. They are shocked that they have received a 1099 from the company that they owed showing thousands of taxable dollars in cancellation of debt in come. Debt relieved in a bankrupcy is not taxable. Of course the debt companies never warned them about this.

Mary Davin
July 22, 2014 at 10:09 pm

It just doesn't seem fair that debt strapped consumers can't do what corporations can to file for bankruptcy and reorganize themselves with a clean slate. It takes money and clout to make money,get into debt, then walk away from debt and do it all over again.

Sylvia Johnson
July 22, 2014 at 8:38 pm

I just signed up for just such a thing and now I am worried and scared. I have really good credit and do not want to mar it.
Can you tell me some of their names they operate under?

Natalie
July 22, 2014 at 8:28 pm

My husband and I used a debt collector to the tune of $700.00 and got nothing but a hard lesson and a loss of our money. We were referred to this company by our real estate agent so we thought they were on the level. What they were was on the take. It was a horrible experience that got us absolutely no where. 8 years later we are still trying to figure out the mess they got us into.

L
July 22, 2014 at 7:20 pm

Having worked for a debt collection dept. of a very large Fortune 500 company, I can tell you they are rarely effective. Most customers don't give them proper information, to be fair, or all the info and their adjust payments don't even cover the monthly interest rate. It's a joke. Outright settlements can be done on your own. You usually do not require hiring a firm to settle on your behalf. That seems to be rarely known. Also the understanding that the debt they "write off" for you, is taxable income to you.

S
July 22, 2014 at 5:34 pm

I ended up filing for bankruptcy after getting no settlement, just lip service from a so-called debt settlement firm--they gave me poor advice, charged a hefty fee and ended up refunding every penny I paid (several thousand dollars) in fees when I complained about the poor advice I got that cost me a lien against my property. A very bad experience all the way around.

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