Be On Your Guard When Hiring a Debt Settlement Firm

According to Smart Money, signing on with a debt-settlement company could put you further into a financial hole.

While debt settlement is a viable option for those deeply in debt but who want to avoid bankruptcy, there are many landmines to navigate when hiring a firm including big fees, questionable services and high drop-out rates. The fees alone are often confusing and significant enough to give most people a pause:

Even the industry admits figuring out the costs is a challenge. "I have seen every kind of [fee] model you can think of," says Jenna Keehnen, executive director of The United States Organizations for Bankruptcy Alternatives (USOBA), an industry trade group. "It's very confusing."

Worse than confusing, it's prohibitively expensive, says Katie Porter, a professor of bankruptcy law at the University of Iowa. She recently came across an offer to settle $33,551 in debt that projected a $5,032 service fee that was to be paid in monthly installments. Only after the service fee was paid off two years later, did the client actually start saving for the settlement. "That $5,000 buys a substantial amount of attorney time," she says. "You can get a consumer [or bankruptcy] attorney to represent you and help with your debt problems for a lot less than that."

So, what's the solution for someone who is interested in debt settlement as an option for getting back on track financially? Smart Money suggests you first make sure debt settlement is right for you. It's a niche service that's most useful only in special circumstances, so it's more likely than not that it will not help in your specific situation. The second step is following the golden rule of being a good consumer: research, research, research. Search the web for reviews, ask potential firms for references, and be sure you understand completely what is and isn't contained in the service being offered and what it costs.

Then again, you could do things the old fashioned way -- cut expenses and apply the difference to your debt.

Comments

[Minimum Wage]

What a ridiculous thing to say! Cut expenses and apply the difference to your debt. An expletive acronym jumps to mind, but I'll be nice: how much do you realistically expect someone earning minimum wage (and already making debt payments) to cut from their spending?

[Chris]

10% of their paycheck, to start Minimum Wage. If you have to get a cheaper apartment, a cheaper car, so be it. If you have to eat nothing but vegetables and rice, that's what you do. If you don't eat out for 2 years, don't go to the movies, or have cable TV (someone earning minimum wage shouldn't be watching TV anyway, they should be reading and educating themselves; despite popular belief you don't need to pay a university thousands of dollars to become educated)...that's what you do! You know what's cheap to live in? A trailer. You do it until you get out of debt, rebuild your financial health and start making your money work for you.

By the time you get out of debt and have yourself back on track, even a minimum wage earner should have increased their income (with putting all the extra into paying debt)...by either becoming a supervisor or manager or whatever, unless they are too lazy to get promoted.

[Matt]

Chris,

I seriously doubt he'll take any of your advice. He told me on another post that he quit a better paying job at McD's because he didn't like it. If he's not willing to do the work...

[Steve "The Debt Reduction Man" B]

I agree with the post. Debt settlement is not for everyeone. People who are stuck in a lot of debt but would rather avoid going bankrupt fall into the category of people who qualify for settlement. Just as any other debt relief situation you should be a good consumer and really check out the company and make sure that it is reputable. Always check the BBB and if the settlement company is a law firm then make sure they have good standing in the bar association of their state.