Friday, February 19, 2010

Beware of Debt Settlement Traps


As the jobs remain scarce and the bills continue to mount, many families are struggling with their finances and looking for help, sometimes in the wrong places. New tips from Consumer Federation of America, Consumers Union, Consumer Action, and the National Consumer Law Center warn that using a debt settlement company could be a trap that will leave consumers deeper in debt instead of eliminating the debt.
In debt settlement, consumers are instructed to make monthly savings payments, usually to a special bank account, until there is enough to make a lump-sum settlement offer to their creditors. But while consumers are putting money into their accounts, the debt settlement companies are taking their fees out of them. Saving to try to settle one debt can take a year or more, and since consumers typically have multiple debts, the process can take three or four years. However, debt settlement companies usually take out all of their fees, ranging from 14 to 20 percent of the total debt, within the first half of the contract. For debts totaling $20,000, a consumer could pay fees of $2,800 to $4,000 and most of the fees are collected from consumers long before debts are settled. And debt settlement doesn’t eliminate all debt for most consumers.
Using a debt settlement program doesn’t stop debt collection and could make a debt situation worse. In some cases debt settlement companies may not contact the creditors for months and some even tell consumers not to have any contact with their creditors.
The Federal Trade Commission has proposed rules that would stop companies that use telemarketing to sell debt settlement and other types of debt relief services from charging fees before they settle the debts. The FTC proposed rule would also require that debt relief services clearly disclose how long it will take to settle debts and reveal any negative impacts including the fact that not all creditors will make agreements.
Tips for Consumers on How to Get Real Debt Relief
• Try to resolve your debt problems with your creditors directly. You may be able to get your interest rate lowered, late charges forgiven, and your monthly payments reduced.
• Contact a nonprofit credit counseling service for advice. It may be possible to work out a plan through the credit counseling service to pay off the debts over time. To find the nearest nonprofit credit counseling services, consumers can contact the National Foundation for Credit Counseling,, 1-800-388-2227 or the Association of Independent Consumer Credit Counseling Agencies,, 1-866-703-8787.
• Know your rights. Ask your Attorney General’s Office if state law limits the amount or timing of debt settlement fees in your state. Find your state AG at
• Read the fine print. Walk away if the contract doesn’t contain the promises that were made to you, or if the contract contradicts what you were told.
• Look for services that charge a fee only after the service actually settles your debts.
• Take immediate action if you can’t make your mortgage or car payments. (Debt settlement services don’t usually address mortgage or car debt.) Contact your lender or mortgage servicer immediately to try to work out new payment arrangements. For help regarding your mortgage, call 1-800-569-4287 or go to to find a local housing counselor certified by the federal Department of Housing and Urban Development.
• Consider bankruptcy. Some people who have too much debt need the fresh start that bankruptcy provides. Get legal advice to see if that is the right choice for you.

The complete tips on debt settlement in English and Spanish are available at:


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