With nearly two decades managing collection strategy for a leading credit card company, I’ve witnessed many economic booms and busts. Riding along these economic waves emerged an industry targeting financially distressed customers with a utopian promise: becoming debt-free.
Debt relief companies first put down their roots during the Great Recession and have continued to grow ever since. Their key claim to fame is settlement. They tell anyone interested that they can negotiate settlements on their behalf. A settlement is an agreement where a creditor accepts less money than the total amount owed. To people struggling with debt, that sounds like music to their ears. But is it true, or is it too good to be true?
Let’s delve into the reasons why we should exercise caution before getting involved with debt relief companies.
Debt Relief Companies Can Ruin Our Credit
No one enjoys receiving debt collection calls. Knowing this, debt relief companies offer to handle these unpleasant tasks for us. All we need to do is sign a “power of attorney” form so that they can act as our representatives. Additionally, they advise us to stop making payments to our creditors and instead direct funds to an escrow account. This approach raises several red flags.
While we diligently make monthly payments to debt relief companies, they may delay distributing funds from the escrow account to creditors until settlement negotiations are complete. Consequently, creditors, seeing no payments, are obligated to report negatively to credit bureaus, causing our credit scores to plummet. Worse, we may remain unaware of the damage because we have designated debt relief companies as our agents, leaving them in charge of all communications.
Debt Relief Companies May Get Us into Legal Trouble
Some creditors choose to take legal action against customers who use the services of debt relief companies. Legal proceedings are lengthy and stressful, adding more headaches to our already complicated lives. Peace of mind is what debt relief companies tout in their marketing materials. However, the risk of being sued by creditors is most definitely not mentioned in their glittery advertisements.
Debt Relief Companies Are Pricey.
Debt relief companies like to present themselves as the solution to financial woes, promising debt freedom through negotiated settlements. They highlight the disparity between the original debt amount and the reduced settlement as savings. However, beneath the surface, these companies impose substantial fees, typically ranging from 15% to 25% of the total enrolled debt.
Consider Angie’s situation: she owes $25,000 to various credit card companies. If she chooses to engage a debt relief company, her total enrolled debt remains $25,000. Once the settlement negotiations are done, regardless of the actual size of the savings, Angie will be required to pay a service fee ranging from $3,750 to $6,250. That’s a significant sum – one that she could surely find better uses for elsewhere!
***
By now, you may wonder, “What should I do with my mounting debt if debt relief companies are not the best route?”
Try Credit Counseling Services
There are benevolent organizations (mostly non-profit) who offer credit counseling services without destroying our credit. Finding them is easy. Every credit card company is required by law to provide a phone number in the “Minimum Payment Warning” section of its monthly credit card billing statement. These organizations offer sound personal finance advice and help create customized debt repayment plans.
Be Proactive: Reach Out Directly to Creditors and Collection Agencies
Generally speaking, creditors are understanding and willing to negotiate. Even if we find ourselves being contacted by someone from a debt collection agency, there’s no need to be overly anxious. The U.S. has strict regulations on debt collection practices. Yes, there are a few bad apples out there, but which industry doesn’t?
Don’t let pride, fear, or shame hold us back. Contact each creditor directly, answer debt collection calls, and discuss options such as lower payment plans or settlements with them. That’s right: we don’t need debt relief companies to negotiate settlements for us. We can handle it ourselves. This way, we achieve true savings without paying hefty fees to debt relief companies.
***
Debt relief companies have deep pockets, plastering their advertisements across various platforms, such as TV, radio, and social media. With credit card debts hitting an all-time high, their presence is even more prevalent. Many people choose to work with debt relief companies out of stress, desperation, and a lack of awareness of the potential pitfalls.
Getting into debt is fast and easy. Getting out of it, though, is anything but. There’s no silver bullet, no magic wand. Be wary of any debt resolution schemes with grand promises. Do the research. Ask questions. Becoming debt-free requires time, patience, and hard work. Take control of your finances. If we can get ourselves into debt, we sure can get ourselves out of it. It won’t happen overnight, but with determination and effort, we will get there.
Nothing is impossible, the word itself says ‘I’m possible’!
Audrey Hepburn
