THE DEBT SETTLEMENT TRAP

Americans nationwide are already struggling with home foreclosures, harsh bank and credit card fees, and now are falling to the so-called “debt settlement” schemes that promise to make clients debt free in a relatively short period of time.  Unfortunately, most consumers who pursue debt settlement services find themselves facing not relief but even more financial losses.

Even the industry acknowledges though not in its constant radio, television and online advertising that debt5 settlement schemes fail to work in two thirds of clients.  Federal and state officials put the debt settlement success rate  lower. 

Here are red flags to debt settlement:

1. Debt settlement schemes encourage consumers to default on their debt.  Consequently they end up with larger fees, penalties, higher interest rates and aggressive collection calls, plus danger of garnishment.

2.  Debt settlement often makes a bad problem even worse.  Once defaulting on the debt the debt burden rises quickly.  As accumulating penalties and interest charges inflate the consumer’s debt-load, creditors begin collection efforts and many eventually sue.  If any of the creditors refuse to settle, the consumer is left worse off than when they began.

3.  The painful bottom line is that most consumers lose the debt settlement gamble.

4.  Even successful debt settlements can come with a high price.  Tax liability.  The amount of savings realized from debt settlement can be considered taxable income.

5.  The problem is not limited to bad actors since the debt settlement approach itself is flawed.  These settlement companies are a trap because they require the client to breach their contract with the creditors.

What to avoid:

1.  Promises that the unsecured debts can be paid off for pennies on the dollar.

2.  Require substantial monthly service fees and demand payment of a percentage of what they have supposedly saved you.

3.  Tell you to stop making payments or stop communicating with your creditors.

4.  Suggest that there is only a small likelihood that you will be sued by creditors.

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