Vision Credit Education, Inc.

If debt settlement companies are focused on helping you reduce and eliminate your debt, how could they be increasing it?

More and more people with significant debt are choosing debt settlement as a way to eliminate their consumer debt and start anew. It is a more attractive option than Chapter 13 bankruptcy. However, many consumers forget that debt settlement takes time. In this time, a consumer can see his/her debt increase rather substantially.

The majority of debt settlement plans involve putting money that usually goes to creditors in a side account. This is done until 50% of the total owed to creditors is accumulated, then the consumer has leverage to negotiate with his/her creditors and effectively settle the debt. However, as mentioned, the consumer will have stopped paying creditors during the time it takes to gather this 50%.

Depending how much one can save every month and the size of the debt, it can take anywhere from 12 months to 3 years to save the necessary 50%. As a result of nonpayment for this time, creditors will add all sorts of penalties to the balance of the debt. So, as you save money in the separate account in the hopes of getting rid of your debt altogether, your debt is actually growing all the while.

So, a major key in debt settlement is the amount of time it takes to execute the plan. 18 months or less is a pretty safe time-period. Anything much longer could wind up being very costly.

Another consequence of not paying creditors is their use of more aggressive collection tactics, and the likelihood of lawsuits and wage garnishments. If wage garnishing occurs, this seriously weakens the consumer’s ability to save enough to settle his debt.

When weighing the options of debt settlement and bankruptcy, the consumer needs to be aware of these realities. In fact, if he files for bankruptcy after participating in a debt settlement program for a while, he will be facing a larger debt than he would have if he’d decided on bankruptcy in the first place.

Some may be thinking that debt settlement won’t have as negative effect on their credit score as a bankruptcy would, but that is not necessarily true. Logically, failure to pay creditors rates negatively on your score but not paying any debt in-full, which is the aim of debt settlement, has a seriously negative effect, as well. Also, any amount of unpaid, forgiven debt is usually subject to income tax.

Not only is debt settlement itself a rather risky option, but the companies offering the service are currently facing serious questions about their business practices. The financial-services website Credit.com reports that the number of complaints about debt settlement firms in 2008 is double the number received in 2007. The Federal Trade Commission has noticed this increase in complaints, as well.

Even some major credit-card companies, like American Express, have had enough of these debt settlement companies and do not want to work with them. When it comes to debt settlement, you probably want your credit-card company to be cooperative.

Many of these companies charge rather large up-front fees. These fees can be 10% or 15% of the debt owed. Also, firms may charge a monthly fee. Sometimes, a fee of 20% or 30% of the amount the firm has supposedly saved the client is charged.

Problems are arising because debt settlement firms are promising services they cannot deliver. Several recent cases make claims against these companies that they misled clients about the actual cost of debt settlement plans and how long they would take. As discussed earlier, the length of a debt settlement plan is crucial.

So, what’s the alternative if bankruptcy doesn’t sound that great either? There are several non-profit organizations that offer “debt-management plans.” These plans help consumers slowly, but surely pay down debt and can even score some help from creditors in the form of lower interest rates or waived fees.

However, there have been instances where these so-called “non-profits” haven’t been as not-for-profit as they claimed and were found to be linked to for-profit companies. So, it’s important to make sure that the non-profit you choose to help with your debt is, indeed, legitimate. Being well-informed is a huge asset in the complex world of credit and debt.