Definition
A debt settlement company is an entity that debtors hire to negotiate lower payoffs on outstanding debt accounts.
Analysis
Debt settlement companies carry some of the highest fees of any type of debt relief company. Furthermore, they cannot do anything above what a debtor may typically negotiate on their own.
Any type of debt settlement is recorded on a consumer credit report with an indication that the debt was satisfied for less than the full outstanding value. This negative notation remains on a credit report until it must be removed by law.
A debt settlement company typically will enter into a contract with a debtor that has substantial debt that often exceeds $10,000. The debtor will be quoted a monthly payment which is made to the debt settlement company. The debtor is instructed to stop making payments to their creditors.
A debt settlement company can charge substantial fees. These may include:
- set-up fee of hundreds of dollars
- monthly maintenance fee of $45 or more
- percentage of “savings” known as forgiven debt
- bounced payment fees of $25 or more
Once all the fees are paid to a debt settlement company and the resulting income taxes paid on forgiven debt, a debtor may often end up paying well over 80% of the amount outstanding. For this reason, debt settlement companies are usually only utilized by desperate consumers that do not research other debt relief options.
If consumers checked Better Business Bureau reliability reports prior to contracting with a debt settlement company, most of these companies would be driven out of business. Some debt settlement companies that were forced to close by the Federal Trade Commission have been reported to have a success rate as low as 2%.
There is one final reason that debt settlement companies are largely ineffective. Legal action, such as judgments are likely to continue on larger debts. Having an agreement with a debt settlement company does not provide legal protection and could result in substantial adverse legal action. Even the most reputable debt settlement company may only be able to provide marginally effective results.
