Use Caution with Debt-Relief Services

By Francine L. Huff
Mortgage Credit Problems Columnist

High debt may have you thinking about signing up with a debt-relief firm. But some debt-settlement companies are coming under attack as customer complaints soar, so tread carefully.

Debt Consolidation vs. Debt Settlement

Services that offer to settle your debts for an amount less that what you owe are debt-relief companies. If you use a debt-settlement firm you'll likely make monthly payments into a special account, which the company is supposed to use to settle your debts for a smaller payoff amount. A debt consolidation service usually helps you find a loan product to combine your debts so that you'll make one payment at a lower overall interest rate.

Complaints Are on the Rise

Investigate any debt-relief firm you're considering before signing up. The number of complaints that have been filed against debt-settlement companies has doubled this year from 2007, John Ulzheimer, president of consumer education for Credit.com, told the Wall Street Journal. The Florida Attorney General's office says it has received more than 1,400 complaints about debt-relief services this year.

The problem with many debt-settlement services is that the money clients deposit into their accounts may not go to pay their debts. That can result in clients' interest rates being increased, as well as the incurrence of monthly late fees. Not only can this cause bad credit, but it could also result in accounts being turned over to collection agencies, a lawsuit, or having your wages garnished.

High Fees

Using a debt-relief firm also means you'll probably be required to pay an upfront fee of 10-15% of the total owed, monthly fees of about $50, and a back-end fee of 20-30% of the amount saved in the settlement, according to the Wall Street Journal.

Bad Credit

Although a debt-settlement plan can lower overall monthly payments on bills, it can also lower an already bad credit score. Debt that is settled may show up on your credit report noted as "creditor settled for less than full amount." You'll also probably be required to pay tax on the amount of debt forgiven in a settlement as well.

In the long run you might be better off finding a way to handle your debts without involving a third party. A debt-consolidation loan is one way to combine your debts and obtain a better interest rate without the risk of debt settlement. The inquiry form on this site can help you compare debt consolidation loans and decide if you want to go this route.

Source:

• Wall Street Journal
• Debt-Relief Firms Attract Complaints," by Eleanor Laise, www.wsj.com.

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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