Many consumers are struggling to pay their debts due to taking pay cuts or becoming unemployed in the recent years. Some take an easy way out and file bankruptcy. Others are looking for an easier way out and turn to debt settlement agencies to reduce their debts.
Debt settlement agencies may also call themselves credit counseling or debt counseling agencies. This may be confusing to consumers, because there are many legitimate credit counseling companies that help people get out of debt. They help to assess the financial situation, to create a budget, give tips on paying off debts quicker. Most of the debt counseling agencies are non-profit or charge very low fees for their services.
Debt settlement companies are scams. They charge very high feesâ€”hundreds or thousands of dollarsâ€”before they provide any services. The fees are usually a percentage of the debt amount and range between 15 and 20 percent. Some fees may be charged upfront and others tacked onto the monthly payments.
Debt settlement companies claim that they can reduce debts by as much as 70 percent. Agents promise consumers to bring the balances down before negotiating with the creditors. In reality, they fail to reach an agreement with the creditors and consumers are left with their debts.
When a consumer signs up for the program, the debt settlement agent tells him to stop taking calls from creditors or collection agents and ignore all communication from them. An agent should not advise that unless he is an attorney who has a right to negotiate a settlement. The real reason for this advice is to keep consumers unaware of the real situations with their accounts. Debt settlement companies will receive more money as long as consumers do not know that no settlements have been reached and creditors are not receiving any payments.
The Federal Trade Commission has received many complaints about debt settlement companies. Based on the statistics, only 1.4 percent of consumers successfully complete debt settlement programs. All others drop out once they realize that the companies have not fulfilled their promises. The FTC advises consumers to negotiate settlements directly with the creditors. If you have been a victim of a debt settlement scam, contact the FTC to file a complaint.