Smart Borrower Blog

Go for Credit Counseling, Not Debt Settlement

Dire economic circumstances bring out the desperate side of a lot of people. And there are plenty of companies ready to take advantage of that weakness. Enter debt settlement companies. They make promises that they will cut your debt in half, or otherwise greatly improve your financial situation. Many sources recently have cried foul when it comes to these "money genies."

A CBS news   post today decried these companies as shady corporations more likely to hurt than help. The author quoted New York Attorney General Andrew Cuomo who is fighting against unscrupulous debt settlement companies in his state:

“Today, millions of hardworking Americans are finding themselves imprisoned by debt. In response, a rogue industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation.”

Here's how some of these companies will get you, according to the National Foundation for Credit Counseling:

 ”A settlement company may suggest that you stop paying your creditors and instead begin making deposits into a special third-party account. The settlement company will attempt to negotiate a settlement offer with your creditor once enough money relative to the debt is on deposit. This may take six months or more, although the exact length of time will vary with circumstances. During this time, the balance on your debt can continue to grow if interest and various penalty fees continue to be charged by your creditor. As a result, you may owe more than when you started and your credit may suffer.”

So what to do if debt settlement looks like your only option to avoid bankruptcy? Start talking to your creditors yourself. You probably won't get the total debt reduced, but you might be able to get a lower interest rate or get them to cut out some fees. It will take more work on your part, but it might save your credit score and save your money for paying off your debts rather than handing it over to a third party.