If you're thinking about using a debt consolidation or debt settlement service to help you get out of debt faster and save money on your monthly payments, make sure you do your homework before choosing a company. There are definitely shams and scams out there.First let me say that debt consolidation is *not*
same as debt settlement/negotiation, which most people don't realize.
Debt settlement companies charge hundreds of dollars as an initial "admin fee" to set up your account, plus a monthly service fee. The fees vary depending on company and amount of your debts.
Such companies take your money every month, but don't make monthly payments to your creditors! Instead, they put it in a trust account, negotiate your debts with your creditors, then make a lump-sum payment when there's enough in your account to pay a creditor in full.
That can take *years* depending on amount of debt you have with each creditor. Meanwhile, you can be sued by your creditors and your wages can be garnished! (Or just don't make payments to your creditors. You'll end up in same spot without paying someone to help you get there!)
Settlement companies don't ask your creditors to stop all interest, late fees and overlimit fees from accruing. That means while negotiations are ongoing, your bills will continue to grow! So if you're sued and a judgement is brought against you, you'll owe more money than before!
And shoddy companies, which there are alot of, don't tell you *any* of this up front. I call it "getting permission by ommission" because they simply don't tell you how their program works *before* you sign an agreement with them. Or after, for that matter. But if you ask right questions, eventually you'll figure it out. (Or when crap hits fan. Whichever comes first.)
Let me give you an example of how debt settlement works.
Let's say you have $20,000 in unsecured credit card debt. You owe $10,000 to one credit card company, $6,000 to another and $4,000 to a third. You agree to a 5 year plan where you pay $250 a month to settlement company. (After all, $250 a month for 60 months is only $15,000, so you're saving $5,000 and you'll be debt-free in 5 years, right?)
The admin fee will cost you $750. Your first 3 monthly payments go towards that and nothing gets put into your trust account until your 4th month.
The settlement company keeps $50 of your $250 payment each month for service fee. That means $200 a month is being added to your trust account.
Most debt settlement companies claim to be able to negotiate your debt for about 50% of what you owe. So let's use lowest credit card debt as an example.
If you owe $4,000 and your creditor agrees to accept $2,000 as payment in full, it will take 10 months at $200 per month to have enough in your trust account to pay off just that one credit card.
But remember, your first 3 payments to settlement company only paid admin fee. That means your first credit card settlement is 14 months *after* you started sending them money.
