Beware of the Phrase "We Can Cut Your Debt In Half!"

by Paul Michael on 17 November 2010 6 comments
Photo: Jimmy Brown

You have no doubt heard that deceptive little saying hundreds of times over the last few years. It’s the rallying cry of debt settlement firms. They seem to be everywhere these days, and there’s a good reason for that. With the equity in the nation’s homes disappearing, and salaries and bonuses taking a hit, people are having trouble paying off credit card loans, store cards, and other debts. And whenever people get desperate, there are other people around ready to take advantage of that situation.

That’s where these debt settlement agencies come into play. Their radio and television ads play constantly, with very respectable-sounding men explaining how a team of specialists can magically “erase half of your debt and get you back in the black in just a few years.”

Well, as I have said many times before, if it looks too good to be true it probably is. And debt settlement firms are no exception. So let’s discover what those companies who talk about “what credit card companies don’t want you to know” actually don’t want you to know about them.

1. Can they really cut your debt in half?

Realistically, it’s very doubtful. On paper they could show you that they have wiped out 50% of your debt, but a closer look will reveal a house of cards. First, these agencies charge fees up front to help you out. If you have $10,000 is debt, you will be paying $1,500 up front to get your debt cut in half. And if you take $1,500 from $5,000, that leaves $3,500. By my calculations, that’s not 50% of $10k. 

2. Do these agencies charge other fees?

Yes. That initial, up-front fee is just the beginning. These agencies also charge you monthly fees to “handle” your accounts. Which is odd, considering that after the debt negotiations have taken place, there’s very little to handle at all.

3. Why are they only interested in helping families with $10,000 or more in debt?

That’s simple: It’s all about cash. 15% of $10,000, up front, is $1,500. That is the minimum amount these companies want from you before they start work. More is better. Less? Well, then it becomes a smaller pay day. And with so many people out there with more than $10,000 in debt, it’s not difficult to find customers.

4. Will their actions have an impact on your credit score?

That’s a resounding yes on that one. The biggest issue seems to be payment of the new “settled” debts. It can take many months for all of this paperwork to go through. And while you’re sitting back thinking your lovely, friendly debt settlement agency is handling it all, you’re racking up late fees and missed-payment penalties. Before you know it, six months have gone by and you’re in worse shape that you were when you first started talking to the miracle-workers.

5. Do credit card companies really fear these agencies?

They may, but not for the reasons the settlement agencies advertise. Many credit card companies are simply refusing to work with debt settlement agencies due to their rotten track record and history of screwing-over the average consumer. That doesn’t make the credit card companies saints, but in this case you’re better off dealing with the devil you know than the devil you don’t. Oh, and your debt settlement agency won’t tell you that they have a sour relationship with your credit card company until after they’ve taken your fee. Then it’s simply a “Sorry sir, we just couldn’t talk to anyone to negotiate your debt. See you later.”

6. It can’t get any worse, can it?

Actually, it can. These fly-by-night debt settlement agencies are set up by get-rich-quick merchants who care more about making money for themselves than saving you any. It’s been known that several of these agencies, who put themselves as the middlemen between you and your creditors, simply take your payments and keep them. “There have been many instances where none of this money ever makes it to creditors — the companies simply steal it,” says Vera Gibbons, CBS "Early Show" Financial Advisor.

7. So what can you do if you have debt?

Well, give these debt settlement agencies a very wide berth. They are not interested in helping you; they are interested in preying on desperate people to extract even more money. It’s more of a gamble working with these companies than it is putting $1,000 on red in Vegas. If you’re looking for positive steps to take, try the following:

  • Talk to your creditors yourself. They will probably not excuse any debt, but they are open to helping you out. They’d rather have some money coming in from you each month than none at all. So talk about lowering rates and forgiving late fees. Most of the time, they’ll be able to help.
     
  • Talk to a credit counselor. There are many legitimate experts out there who can help you work through your financial troubles for a very nominal fee. Some charge as little as $20 for a session, and that is money that will be recouped with the information they give you. Of course, as always you should research any agency you do business with. Start with the Better Business Bureau.
     
  • Talk to your bank. Many banks are willing to talk to you about the financial options you have. They could offer you a very good loan to consolidate your debts, or put you in touch with credit counselors that they trust. Again, do your research before speaking with any expert.
     
  • Build a budget. If you don’t have one, you need one. You can find often find places to trim some cash. Even if it’s just a few dollars here and there, it can add up. Applying that to your debts will help you pay them down more quickly.

Remember, a poor economy can make people become desperate. When people are desperate, they’re looking for a way out: a painless, simple, quick-fix. But like weight loss or learning a language, there isn’t one. These agencies cannot wave a magic wand and make your debt just disappear. Only magicians like Penn and Teller can do that. And even then, they’ll tell you it’s just an illusion.

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Guest's picture
Christie

Start out by not spending more than you actually have in hand, the best advice you can follow. I know it is not always possible, but if you don't have the money set aside already, do you need to spend $$$ on things because you're told you "deserve" them? Not true at all.

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Guest

And if all that wasn't bad enough, the IRS considers forgiven debt to be taxable income.

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Guest

I assure you credit card companies are NOT working with individuals.

Guest's picture
Russel

If someone is having trouble making credit card payments, find a credit counselor who is affiliated with the National Foundation for Credit Counseling. NFCC members can help come up with a budget , provide credit counseling for free, and may provide debt management for a small fee (3 - 5% not to exceed $50 monthly).

Guest's picture
Jessica

You need to check your facts. Last month Congress passed a law that no longer allows debt settlement companies to charge up front fees. Now they can only charge you after they have negotiated the settlement and you've agreed.

You are right that many of these firms are questionable but factual errors like this call your entire site content into question for educated readers.

Guest's picture

Jessica's right. That's a pretty big oversight. This was actually communicated a few months ago.

http://www.ftc.gov/opa/2010/07/tsr.shtm