Yes, of course, some debt settlement companies are legitimate.
Like all industries that make a lot of money quickly, the debt settlement industry has many scammers.
Real debt settlement companies will never lie to you or guarantee all of your debt will settle 100%.
They will also explain to you their exact process and the risks involved in it. Additionally, they will be clear about their fees.
Keep reading to learn what to expect during debt settlement, common frauds in the industry, list of best debt settlement companies for 2021 so far, and how to choose the best debt settlement company for you.
Do Debt Settlement Companies Really Work
In a debt settlement program, many things will happen. However, two key factors are guaranteed to happen.
Only some of your debt will settle and risk is involved.
What to expect in a debt settlement program
With that said, debt settlement programs are a service offered by for-profit companies.
They negotiate with your creditors to resolve your debt for less than what you owe, eventually.
It is common for this process to 2-5 years depending upon how much debt the company is trying to help you settle.
First, you will stop making payments to all of your creditors.
Second, the money you would normally pay your creditors will be put into a savings account managed by the debt settlement company each month.
Third, it is legal but the laws in each state are different for debt settlement programs. Make sure you review the laws in your area
Risks to consider
Debt settlement companies usually expect you to put the money you are withholding from your creditors into a savings account for 36 months (3 years).
The savings account acts like an escrow account, meaning you send the monthly payments to the company and they manage the funds.
I know this may seem odd but it ensures you will not spend the funds before settlement is complete.
Similarly, if you own a home, this process is something you participate in with your mortgage lender.
For example, you send them a monthly payment for the property tax on your home. The mortgage lender doesn’t actually pay your property taxes until December of each year.
Therefore, your lender manages your tax money until the bill is paid.
However, 36 months is a long time to go without paying any of your creditors.
A majority of participants end up dropping out of the program only after a few months because their already high debts climb higher from fees, penalties, and interest accrual.
Another huge risk is your creditors do not need to agree to a settlement. There is never a guarantee your debt will settle. If it doesn’t you might be worse off than you started.
Additionally, all of the smallest debts will settle first when the settlement process actually begins. Likewise, expect to see your largest debts climb to an even more stressful height.
Keeping in mind not all of your debts will settle. Always expect to have some delinquent accounts to deal with on your own.
Also, expect your credit score to decline even more since you will not be making payments during the 36-month hiatus.
Typically, debt collector calls and mailed threats will not stop during this process. A creditor could even decide to sue you in court.
Once they reach a final judgment, the creditor could legally garnish your wages or put a lien on your home.
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Debt Settlement Scams
Scams can occur in any industry but they appear to be prevalent in the debt settlement industry. The Federal Trade commission (FTC) collects complaints about scams in many industries.
In hopes to help prevent fraud the FTC has created a list of red flags to watch out for when looking for a legitimate debt settlement company.
Avoid debt settlement companies that:
- Seem to evade questions regarding the risk to you in a debt settlement program
- Charge you fees before any debt is settled
- Claims there is a new government program designed to erase personal credit card debt
- Guarantees all unsecured debt will go away
- Advises to stop communicating with your creditors without explaining to you, clearly, the consequences of that action
- Claims they will stop all debt collection calls, mailings, and lawsuits
- Promises your unsecured debt can settle for a 30% – 60% discount. A common negotiated discount is usually 30% maximum.
Best Debt Settlement Companies
According to Investopedia and Bankrate below are the best debt settlement companies from 2020 – 2021.
Next to each is the service the company has mastered above all others.
- National Debt Relief – Best overall service
- Accredited Debt Relief – Best Debt Settlement
- DMB Financial – Best high interest credit card debt
- New Era Debt Solutions – Most effective and timely settlements
- CuraDebt – Best tax debt relief
- Freedom Debt Relief – Best interactive program
- Pacific Debt Inc – Best for customer service
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How to Choose the Best Debt Settlement Company
If you are looking to hire a debt settlement company, there is a way to complete research in order to find the best fit for you.
Due to the high level of fraudulent debt settlement companies, several governing bodies have created company verification systems to help you find a legitimate service.
However, before you start researching debt settlement companies complete a quick search of laws regarding debt settlement in your state.
Each state has their own preferred rules of how debt settlement programs operate.
Resources to verify a legitimate debt settlement company:
- Consumer Financial Protection Bureau (CFPB)
- You can research complaints against the company
- Contact the Attorney General’s office of your state
- Ask about complaints against the company and how they were resolved
- Better Business Bureau (BBB)
- The most common place consumer complaints are reported
- GlassDoor.com
- Consumer experience reviews
- TrustPilot.com
- Consumer experience reviews
Criteria to look for in a debt settlement company:
- Ask the company about their fee policy and what their fee calculation is based on
- Is their fee a percentage based on the total original debt or the total settled debt?
- Find out how many points your credit score is expected to drop once the program is complete
- What should you expect if a creditor refuses to settle a debt?
Now, the three criteria above will help you weed out the scammers right off the bat.
When you ask about their fees, a non-legit company will state they require payment upfront.
A legitimate debt settlement company cannot charge you for its services until the debt settlement program is complete.
If they claim your credit score will not change, or if they evade the question all together then do not work with them.
Finally, the last question above will lead a scammer into making a claim that all of your debt will settle.
Always remember, companies you owe money to do not have to settle your debt.
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Your Take Action Guide
If hiring a debt settlement company is the path, you want to take on your debt pay off journey.
Then follow the steps below to locate a legitimate debt settlement company.
- You can talk to friends, google, research yellowpages.com, or ask questions in debt management groups on Facebook to start creating your list of debt settlement companies.
- Once you have your list, start researching those companies using the verification resources listed in the section above. This will narrow down the companies you want to work with
- Create yourself a cheat sheet of the common scams listed under the, “avoid debt settlement companies that,” section.
- Write down the three questions in the “criteria to look for in a debt settlement company” section.
- Start calling each company still on your list and interview them. Write down their responses to the questions you wrote down in step 4.
It’s ok to feel nervous about doing this. I know discussing your financial situation with strangers is hard.
Nevertheless, in the end, the debt settlement company is providing you a service and you are purchasing that service.
You are the boss. Try looking at it as an interview. If you do not like how the service will handle your situation.
Or you feel, they are trying too hard to get you to sign up. Do not hire them; you are the one who is in control.
One final piece of advice, choose a debt settlement company that communicates well with you.
A debt settlement program can take 2-5 yrs. to complete.
The last thing you want to do is fire your debt settlement company in the middle of this process only to start it all over again.
References
https://www.consumer.ftc.gov/articles/0145-settling-credit-card-debt
https://www.investopedia.com/best-debt-relief-companies-4846588
https://www.bankrate.com/personal-finance/debt/best-debt-settlement-companies/
https://www.bankrate.com/personal-finance/debt/best-debt-relief-companies/
https://www.debt.org/advice/relief-options/debt-relief-companies/
https://loans.usnews.com/debt-settlement-companies
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