TV advertisements and internet sites claim you can settle for pennies on the dollar, as part of the U.S. Economic Stimulus
If you watch TV, you've seen the ads for "U.S. Debt Relief." These suggest or state that you can pay off your debts for pennies on the dollar, using the billions that Congress set aside from the Federal Stimulus Relief Program to help consumers. These ads are FALSE. The G.A.O. recently reported to a U.S. Senate Committee its undercover investigation that consumers are being scammed out of thousands of dollars, leaving them WORSE off and pushing them even faster towards financial ruin and bankruptcy.
A hefty advance fee before settling any debt
The companies that the G.A.O. contacted undercover generally required the client to pay its fees up front, before any debts were settled. Expect to pay thousands of dollars in fees, some of which you may not catch in their contract's fine print.
Stopping monthly payments on credit cards, will drastically lower your credit scores
The companies that the G.A.O. contacted undercover generally required the client to stop making monthly credit card payments, which means your credit drops dramatically. People with better credit history will notice their scores lowered most dramatically.
Low success rates, compared with false claims of 85%-100% favorable
The companies that the G.A.O. contacted undercover represented success rates for 85% to 100% of its clients. That would be like saying they always won at the casino. The findings were that their actual, average success was in single digits (less then 10%) for debt settlement, according to filings with state regulators. Individual groups may have higher favorable results, but still a much lower than the false 85% rate.
Case example of a Riverside, CA secretary: how $7000 grew to $15,000 in Debt
The G.A.O. report includes a sad example of the Riverside secretary, who "joined the program after receiving an e-mail in August 2000 and being told by a representative from one of the companies that she could be completely out of debt in 16 months." At the time she applied, she had only $7000 in credit card debt. They told her she would be enrolled in debt management classes, but she was not. She paid about $1700 in fees. Within three months of joining, she received letters threatening legal action. Then, two lawsuits were filed against her. When she filed bankruptcy a year later, she had $15,000 in debt.
Case example of SUCCESS: a NY Widow, who paid $5100 to settle a $3900 debt
There are many examples in the G.A.O. report, including the 75-year-old widow from New York who paid $5,100 to settle a debt that was only $3,900, after receiving a marketing call from the debt settlement company that proposed it could reduce her debts by 24 to 40 percent. That's the sad part. The sick part is that this company counted the widow as one of its success stories.
Myth about the 2009 Credit Card Bill of Rights helping to settle the balance due
Recent TV ads promote new federal laws that made it a "right" to settle your credit card debt for a fraction of the amount due. FALSE. The new credit card laws did nothing about your balance due or offer new ways to settle it for less. It regulates the fees and interest rates charged and makes more fine print disclosures. Nothing has changed, if you try to pay less than the minimum on your statement or want to negotiate a payoff that is less than the amount on the statement.
Don't fall prey to debt settlement by so-called non-profit entities or that target Christians
These companies will say anything to get you to hire them over another scam company. The G.A.O. report contains examples of companies touting a "Biblical" market orientation or that they are non-profit organizations. Also, there are two trade associations willing to put its seal of approval on a business or entity: "The Association of Settlement Companies" and "the United States Organizations for Bankruptcy Alternatives." If these programs actually follow the guidelines of such trade groups, that would be a good start, but they seem to fail at getting members to actually live up to their promises to clients.
Two very bad lawyers in New York and Maryland
Lawyers offering debt settlement were mentioned a twice in the G.A.O. report of scam companies that provide little or no debt settlement services presented. One was a New York attorney who embezzled millions of dollars. The other attorney was from Maryland, having collected more than $3 million from clients. This is a sad state of affairs in the legal community, which is supposed to be closely policed by the Bar Association and the Courts. All of us must take care to understand what services we are getting, the cost, and the qualifications of the person being hired.