I often get calls from people who have hired a debt negotiation or debt consolidation company and are very upset about how things are being handled. I hear “I was told my debt would be settled but a creditor got a judgment against me and is now garnishing my wages” or “I have been paying this company for months but they have only negotiated with one creditor” or “I was told this would be better than bankruptcy but now I am further in debt and my credit scores keep dropping.”
I would like to explain how most debt settlement companies work. When you call the company, they tell you they can negotiate a substantial principal reduction and get you a lower monthly payment. They ask you to provide the names of your creditors and the amounts owed. You are told to stop paying your creditors and to instead send them a certain amount every month.
What they don’t tell you
1. They put your money in a saving account until it reaches a certain amount. At that point they begin negotiating with your creditors.
2. Your creditors are not being paid while they are waiting for the account to grow.
3. Your creditors don’t have to negotiate and can sue you at any time. Remember, you stopped paying them.
4. The company generally only negotiates with one creditor at a time.
5. Collection calls may start or continue.
6. Your creditors can report your late payments to the credit reporting agencies.
7. Your creditors can report any forgiven debt to the taxing authorities and you could end up owing taxes on it.
8. Your creditors can continue to charge interest on the debt.
9. Your creditors can report any settlement as “paid settled” or “charge-off settled” which negatively impact your credit.