Entertainment, Health and Lifestyle

Beware Debt-settlement Schemes and Scam Artists

The ads are compelling. “If you have at least $10,000 of credit card debt, you are eligible to have half of it forgiven!” “Debt-settlement solutions!”

I see these ads nailed to telephone poles, plastered all over the internet and broadcast over radio and television. Even though I know what’s going on, they grab my attention and make me wonder for a second or two if perhaps I’ve missed some new bailout legislation.

In an act of due diligence, I have inquired of a number of these come-ons. It’s not pleasant. Not one of the companies I have contacted will answer any of my questions. They are tight-lipped, insisting that first I must give them my Social Security number, and the details of my supposed debt before they can answer any questions. Of course I will not do that. I just want to ask a few basic questions.

But that’s OK. I’ve learned plenty from readers who’ve been taken to the proverbial cleaners and then forced into bankruptcy. I’ve learned even more from people who’ve had the misfortune of actually working for one of these debt-settlement companies.

The ads are worded in such a way to make us believe that this new “eligibility” to get debts forgiven is part of the stimulus plan approved by Congress.

Well now, isn’t that interesting! And who wouldn’t want to jump onto that bandwagon? Hear the truth: There is no such provision in any stimulus plan. There is no such provision in the Credit CARD Act of 2009. No one is entitled by law or common sense to have their credit card debt settled for half as long as they have at least $10,000 in debt.

This is how they work: Before the process starts, these companies require that a new client sign a contract. I have numerous copies of these debt-settlement contracts in my files that burned-up readers have shared with me. I’ve pored over the fine print. It’s not pretty.

There’s always a monthly fee that the client must pay to the settlement company for its service. If there’s one thing these companies are not, it’s stupid. They know that people in the kind of trouble that prompts them to fall for a debt-settlement scam probably don’t have a great history of on-time payments. And they know things are about to get worse, so they take care of themselves first.

The settlement pitch explains that in order to settle your debts using their magic powers and secret knowledge of the law (please do not miss my sarcasm here), they need to have money to offer to the creditors.

They explain that by diverting your payments from your credit card companies to them to hold in safekeeping, you’re doing two things: You’re not paying your monthly payments, which makes your creditors really nervous and therefore incredibly anxious to accept any offer of settlement, and you’re building up this big pile of money with which to do that.

What the debt-settlement companies do not make clear right up front is a little matter called their fee that allows them to become your savior.

Typically, this is the total amount of the client’s current minimum monthly credit card payments. For those in such dire straits as to be considering debt-settlement, that’s usually a pretty big number or at least $500 a month. The contracts I’ve reviewed require that this monthly payment to the debt-settlement company be set up as an automatic payment from the client’s bank account each month.

One contract I have in my file identifies the first 17 monthly payments as belonging to the company to fulfill its negotiated fee.

Here’s one scenario related to me by a reader: “They kept collecting my money every month while I was getting harassing calls from my creditors. When I would call to ask about how the settlement talks were going, they would blow me off saying they needed more time to negotiate with my creditors. Or that my settlement account wasn’t big enough yet.”

I will go so far as to say that these debt-settlement companies are opportunists not unlike ambulance-chasing attorneys. They are capitalizing on the naivete and financial hardship of so many who are facing devastatingly huge amounts of credit card debt.

Just because a credit card company might negotiate your outstanding debt doesn’t mean you should take that route. You borrowed the money, you promised to repay — all of it. And that’s the highest and best thing to do. It’s called personal responsibility. But perhaps getting the interest rate lowered or penalty fees waived could go a long way to getting you back on track.

Or, let’s say that despite morality and responsibility, you find yourself in an untenable situation where you are unable to keep up with your payments. Your choices are slim and bankruptcy is staring you in the face. Settlement might be the lesser of two evils in which case, of course, that would be a viable option. However, there remains the small matter that you need to have money available in order to negotiate a settlement.

You do not need someone else to go to your creditor on your behalf.

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Mary Hunt

Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, "Ask Mary." Tips can be submitted at tips.everydaycheapskate.com/ . This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book "Debt-Proof Living."

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