Are All Debt Settlement Companies and Law Firms Bad

If you peruse the Federal Trade Commission’s website for consumers or perform a Google search for “debt settlement,” you are likely to come across a myriad of articles describing the many different ways in which debt settlement companies are unhelpful at best and, at worst, are scams that will take your hard-earned money and leave you in a worse financial position than before. Some of the more common complaints leveled against debt settlement companies include:

• Debt settlement companies cannot deliver on their promises to settle “all of your debts” because not all creditors will participate in a debt settlement program;
• Debt settlement companies charge upfront fees without doing any work on your behalf;
• Debt settlement companies encourage you to stop paying on your credit accounts and instead pay them all your disposable cash, which can cause you to fall even further behind in your payments and possibly affect your credit rating; and
• Debt settlement plans are little better than filing for bankruptcy as both have a serious negative impact on your credit score. Some debtors would simply be better off filing for bankruptcy.

Make no mistake: There are companies and firms out there that prey on debtors in terrible financial straits. These companies and firms may call themselves debt settlement companies, debt relief agencies, or any other number of things in an effort to gain the trust of desperate debtors. The truth about legitimate debt settlement companies and firms, however, is that:

• Debt settlement agencies do not promise to be able to resolve all of your debts. A legitimate debt settlement company will tell you up front that the success of a debt settlement plan will depend on you successfully completing the plan and your creditors accepting your proposed plan. Your debt settlement company may be able to tell you (based on its previous experiences) whether a certain creditor is likely to agree to a debt settlement plan. No legitimate company will promise to settle all of your debts without at least first reviewing the debts you are looking to resolve through settlement.
• A debt settlement firm will not ask for an upfront fee. Legitimate debt settlement firms should not require you to pay an upfront “sign-up” fee but will instead generally charge you a monthly program fee for each month that you are participating in the plan or when it makes a settlement payment to your creditor. A legitimate company will also clearly spell out the fees it will charge you and when these will be assessed in the initial documentation you review when deciding whether to sign up.
• Debt settlement companies work with you and your creditors. Debt settlement companies and firms are often a liaison between an indebted debtor and a creditor wanting to get paid. A debt settlement firm will often communicate with your creditors to determine how your debt with each particular creditor can be settled. Your debt settlement company will also try to negotiate the most favorable terms for you, including obtaining a written agreement from the creditor to refrain from collection activities unless you fail to follow through with the debt settlement plan. If your debt settlement firm is a law office, your attorney may additionally request that all communications to and from your creditors be made through him or her. However, there should not be no communication occurring between your creditor and you. Whether you receive information directly or through your debt settlement firm, you should be receiving some communication and feedback from your creditors while you are in a debt settlement program.
• Debt settlement does hurt your credit: Any debt settlement program that says that a debt settlement will not affect your credit is lying. The extent to which debt settlement will affect your credit depends on your present credit score and situation. In general, a bankruptcy results in a much greater drop in your credit score than debt settlement, and this drop usually prevents you from obtaining new credit for a lengthier period of time than if you settle your debts.