Important Tips for Consumers Considering Debt Settlement Services

A Florida based law firm practicing in class actions, business disputes, personal injuries and consumer debt, shares important information for consumers considering debt settlement services, including tips to avoid scams.

According to the law firm, the Federal Trade Commission passed a law in 2010 that amended the Telesales Rule, effectively banning advance fees on debt reduction services. Consumers must be aware going in that debt settlement companies are not allowed to charge fees in advance for settling debt until they have successfully settled at least one credit account. The law firm points out there are still many companies that fail to comply with this law, often because they know they won't actually succeed and want to be paid anyway.

Wites & Kapetan also points out that many consumers fail to understand that they may be sued by their creditors after signing up for debt settlement. Consumers who sign up for a debt reduction plan are typically instructed to stop paying bills to build up a lump sum of money for a settlement offer while also gaining leverage. Unfortunately, this gives creditors the right to sue in civil court for defaulting on the loan. Non-attorney debt settlement companies cannot represent their clients in court or offer legal advice, and most will drop any client who is facing a lawsuit.

Wites & Kapetan also urges consumers to first make sure their debt isn't already past the statute of limitations in their state before ever attempting to settle. In most states, there are laws stating creditors have a specific amount of time to collect the debt or lose their right to do so. Still, creditors will not turn down the opportunity to "settle" a debt they know is past the statute.

Finally, the law firm reminds consumers that debt settlement may not even be in their best interest. Bankruptcy may be a better option, depending on the type of debts of the balance, as individuals facing a massive amount of debt that won't be made more affordable with a settlement may only be digging themselves into more trouble by signing up for debt reduction services.

The firm specializes in negotiating pre-litigation resolutions of consumer debt disputes and has successfully obtained recoveries for and defended consumers in credit card disputes and consumer debts, including representing clients in court if they have been sued by a creditor. Wites & Kapetan also provides bankruptcy counseling and filing for consumers best served by filing for bankruptcy protection.

When is Debt Settlement a Good Idea?

Debt settlement services are certainly not for everyone, and the industry is still very unregulated, but it is worth considering in some cases. If you decide to turn to debt reduction services, make sure you exercise extreme caution and do your homework before working with a company, or even a debt settlement attorney, to avoid being taken advantage of.

Settlement allows you to pay less than your balance by negotiating with your creditors for a smaller amount to satisfy the total debt. While this may sound like a great solution to help you overcome a mountain of debt, there are serious consequences. Debt settlement companies appeal to consumers who are very troubled by debt but wish to avoid bankruptcy at all costs - and all costs is right. Not only is this service very expensive, it will also do serious damage to your credit.

Potential dangers of debt settlement include:

• Fraud: There are some companies who offer debt settlement services who are no more than fly-by-night scams, taking huge upfront (and illegal!) upfront fees and disappearing. Other debt settlement companies are simply too inexperienced to effectively negotiate a deal, or even bother. Either way, your money is wasted at a time when you cannot afford the loss.

• Damage to your credit: Debt settlement companies will require you to stop paying your bills to build up a lump sum for settling, and to get leverage, but this comes at a cost. Your credit will be tanked, and the higher your score to begin with, the harder the hit. Successfully settling debts also hurts your credit.

• Lawsuits and wage garnishment: Creditors will often escalate their actions against you when you obtain debt reduction services from a company. This means they are quick to file a lawsuit when you default, which can lead to a lien against your property and wage garnishment. In many cases, creditors will immediately take legal action when they find out you're working with debt settlement companies.

• No regulation: The federal government does not regulate debt settlement companies and the few rules they have in place are largely ignored. Proceed at your own caution.

• Taxes on forgiven debt: The IRS will usually consider the difference between what you owe and what you settle for as taxable income. This means you may owe about $2,500 in taxes for every $10,000 that's forgiven.

• Cost. Debt settlement is very expensive, and some companies will charge 14-18% of the total balance that you want settled, while some will want a huge percentage of the amount they successfully settle.

• Time involved: Finally, debt settlement is not a fast process and the average debt settlement process is longer than two years.

When Does it Make Sense?

So, when does attempting to settle your debt actually make sense? If you can afford your debt but only if the amount is reduced, attempting to settle may be a good option. In general, settlements should be used if you can't qualify for Chapter 7 bankruptcy (or cannot afford to do so because of your job), if you accept that your credit will take a big hit and you understand that you may be on the hook for paying a lot in taxes and fees.

If you're thinking about turning to debt settlement, consider working with a debt settlement attorney versus a non-attorney company as they can represent you in court if your creditors sue you, and they will offer better leverage in dealing with your creditors.

Warning Signs of a Debt Settlement Scam

With millions of Americans facing hard times and unbearable amounts of debt, it comes as no surprise that debt settlement companies are everywhere, advertising that they can settle debt for pennies on the dollar, stop creditor calls and preserve your credit. Unfortunately, most of these companies make unreasonable or even illegal claims, and you can get yourself into even greater trouble by signing up for their services, left in the end with an even greater amount of debt and thousands gone in fees.

Before you consider debt reduction services, make sure you know the following warning signs of a scam. 

1. They claim they can dramatically reduce your debt

This is the primary claim associated with debt reduction services, of course, but it's a serious red flag if a debt settlement company claims they can and will do so. It's true that some of your creditors may be willing to reduce your balance, but this is an unrealistic claim and they cannot make any sort of guarantee.

2. They claim they will stop collection calls and prevent legal action

Be aware that debt settlement companies have absolutely no control over the debt collection practices of your creditors. This means they cannot stop collection calls, and they absolutely cannot prevent legal action against you. Unfortunately, many creditors are known to become more aggressive, not less, when they find out you are working with one of these companies. That means collections will start sooner, and you will be more likely to be sued in court. In this case, the company cannot help you.

3. They charge a high upfront fee

Did you know it is illegal for debt settlement services to be charged upfront? A debt settlement company must successfully settle at least one debt before charging you, so be aware of your rights. Also, a legitimate company bases fees on the amount you owe to your creditors and it's directly tied to their performance on your behalf. Don't agree to pay huge fees for a service you do not know you will even receive.

4. They tell you your credit will be unharmed

Do not trust any company that provides debt reduction services if they tell you your credit will not be affected. The truth is your score will be affected when a debt settlement company gets involved. You will most likely be told to stop paying your accounts to create incentive (which causes late payments on your credit), and even the successful settling of a debt is a red mark on your credit that remains for 7 years.

5. They tell you not to speak with creditors

Finally, be aware that this is only an attempt to keep you from knowing the real status of your accounts. This is not something a reputable company will do, and one of the many reasons you may be better off working with a debt settlement attorney who is bound by the law and works in your best interests.

Struggling with Debt? Here are Your Options

With the economy still recovering, millions of Americans are struggling with consumer debt. If you're barely managing to hang on, or debt collectors are already hassling you, the best thing you can do is come up with a plan of action as soon as possible.

If you're facing a level of debt you can't afford, you do have a few options available to you. These include:

• Setting up a budget and contacting creditors yourself

• Getting help from a credit counseling agency

• Turning to debt settlement companies

• Working with a debt settlement attorney

• Filing for bankruptcy

What are the Consequences of Not Paying Debt?

If you're having trouble paying your bills, it's important to understand the type of debt you have and the consequences of not paying. There are two types of debt: secured and unsecured.

Debt may be secured by property, or collateral, to guarantee repayment of your loan. If you can't repay your secured debt, the creditor can take back the property without suing you or getting a court judgement. Common examples include car loans, mortgages and home equity lines of credit.

Debt may also be unsecured, which means it is not attached to any particular property. If you don't pay this type of debt, creditors may sue you and get a court judgement, which may mean your wages will be garnished. Examples include credit card debt and medical bills.

Tax debt and student loans are in a separate category, as the government is allowed to take drastic action without getting a court judgement. These debts are generally not dischargeable in bankruptcy, unlike the first two categories.

1: Contacting Creditors Yourself

If you go this option, you should begin by making a budget and listing all of your outstanding debt. Look for ways to reduce your spending and expenses, and increase your income, then come up with a realistic amount you can put toward debt every month.

From there, contact creditors one by one and explain the situation to hopefully get a payment plan. You may be able to negotiate for reduced late fees, a discount on the balance or a lower interest rate.

2: Credit Counseling

Credit counseling agencies are another option if you can't work out a plan with your creditors, or you need help. An accredited, nonprofit credit counseling agency may offer money management classes, budget counseling, debt counseling and refer you to other agencies to help. Some may even help you contact creditors and set up a debt management plan.

3: Debt Settlement Companies

Companies that offer debt reduction services are one option available to you, although you need to be aware of the reality. These companies often make unrealistic promises they cannot keep, such as guaranteeing your creditors will discount your total debt, and their fees can be very high.

Most will also get you into trouble by causing even further damage to your credit by telling you to stop paying your creditors, instead diverting this cash into an account and paying their fees. The idea is, after 6-12 months, this lump sum will be used to reach a settlement agreement with your creditors, but that does not always happen.

Instead, your creditors may increase their collection actions against you or take you to court when they learn you're using debt reduction services. If they sue you, these companies cannot represent you in court or offer legal advice. They also cannot stop phone calls from your creditors, and the cost to sign up for their services can easily cost you thousands. Many will also not tell you that you may owe taxes on any debt that is successfully forgiven.

4: Debt Settlement Lawyers

While the services a debt settlement attorney offers ay seem similar to a debt settlement company, working with an experienced law firm comes with some distinct advantages. Attorneys often have better leverage against your creditors, who have their own army of lawyers on their side. A lawyer will also be able to give legal advice and represent you in court if your creditors sue you, working to obtain a pre-judgement settlement of your debt. If a judgement against you is obtained, they will assist you further in protecting your assets.

5: Bankruptcy

Finally, do not overlook bankruptcy as an option. While most people want to avoid it at all costs, it may be your best option if even a settlement won't be affordable to you. Bankruptcy has its consequences, including damage to your credit and possible employment issues, but it will completely erase most debts, including a mortgage, car loan, credit card debt and other consumer debt, allowing you to get a fresh start on life.

Debt Settlement Legislation You Need to Understand

Advertisements for debt reduction services (which go by many names) are seemingly everywhere. Unfortunately, some of these companies are scams, while a great deal many just charge you a lot of money and leave you worse off than you started. The FTC Telemarketing Sales Rule and many state laws have been put into place to offer protection against many of these scams, but that doesn't mean you can't still get in trouble.

Types of Debt Reduction Services

Services you may see advertised include:

• Debt management service or credit counseling. These companies typically claim they will set up a plan to pay back your creditors for you, often by reducing the interest rates or even the principle so you can afford the plan.

• Debt settlement companies. These companies will usually claim they can reduce your debt by 50% or more and work be negotiating with your creditors to convince them to accept a one-time reduced lump sum payment or a few payments to pay off the debt. You will be required to make monthly payments into a bank account from which they take their fee and (ideally but not usually) pay the creditor when enough money has built up.

• Debt negotiation services. These companies will claim they can get creditors to reduce your payments, but they won't necessarily have an overall debt plan.

Scam-Ridden Industry

Unfortunately, this entire industry is plagued with scams. The FTC and several state attorneys general have sued hundreds of debt settlement companies over the years for misleading customers about what they can actually accomplish, how high their fees are and for violations of consumer protection laws and state laws. Many nonprofit credit counseling companies also had their nonprofit status terminated by the IRS for making a profit.

Federal & State Regulations

Nearly every state has laws regulating companies that provide debt settlement services, and many states prohibit these companies from even doing business. In many areas, these laws do not apply to debt settlement lawyers, whose services do have a greater benefit.

The FTC updated its Telemarketing Sales Rule in 2010 to give consumers some protection against these companies. This law applies to for-profit companies, services related to unsecured debts (like credit cards) and services rendered if the company calls you or you call them in response to an ad.

Before you pay any money to the company, they must disclose:

• The time necessary for the claimed results.

• If the service includes the settlement offer, the date the company will make the offer to your creditors and how long it will take to make a settlement offer to every creditor.

• The amount of money (or percentage of your debt) that must accumulate before the company makes a settlement offer.

• If the service requires you to stop making payments to your creditors, the negative impact on your credit, the fact that your creditors may sue you, and how much you may owe due to interest and fees.

• Your right to cancel the contract and receive a refund within 7 days of any money held in the account.

Companies that provide debt settlement services are also prohibited from collecting fees until it has received an agreement to reduce at least one debt, and you have made one payment on that agreement. This is very important to remember, and it's one of many rules that is often broken.

Before you turn to any services designed to reduce your debt, make sure you understand your rights under the law and avoid any companies that raise red flags by breaking these rules that protect you.