Debt Settlement companies sell you a program which requires you to deposit (or allow automatic withdrawals of) a sum of money into a special savings account. Once this account has grown to a certain level, the debt settlement company will make a settlement offer to one of your creditors for a lump-sum payment.
There's the "yes" part of the answer. Yes, in theory, it could work.
The "no" part of the answer is related to the "run" part, which I'll explain next.
While the save-and-settle plan can work, it's problems are not insignificant.
First:
you are advised to stop paying your debts immediately.
This alone will result in increasing damage to your credit report, as well as joyous, frequent and friendly calls from the creditor's collections department.
Getting those already? Well then, debt settlement won't help you there either as it does absolutely nothing to put the creditors you owe to rest immediately.
Second:
part of your monthly deposit to savings is taken by the settlement company in fees.
While fees vary, rates of 15-20% of the outstanding debt are common. Note that that's 15-20% of the outstanding debt, not the amount it's settled for.
If you are attempting to settle a 10,000 credit card debt, you will pay $1,500-2,000 to the settlement company alone, regardless of the amount the debt is eventually settled for.
Meanwhile, as you are accumulating the settlement funds, your creditor is increasing your debt with fees, interest and late charges, making the process of saving up a settlement rather like trying to hit a moving target.
You'll have to save enough to not only pay a significant portion of the debt itself, but also the increasing interest and fees added on top!
At this point you could've very well made the minimum payments on the debt plus additional principle payments to wipe the debt out on your own... And you'd have done it 15-20% less expensively to boot.
Third:
Time is against you.
Let's assume that you've managed to accumulate enough cash to settle the first debt.
Now you move on to the second.
By now several months have passed and your remaining creditors are becoming impatient, rude and perhaps threatening with you.
Some will have sent your account out to a third-party collector, some will have assigned it to an attorney, some will do both.
Your credit report is now full of 30-60-90 day lates, perhaps charge-offs.
The only guarantee is that absolutely none of your creditors will sit around patiently and do nothing waiting for you to make them an offer.
This little fact gives reason to the "run" part of the answer.
Fourth:
You are a target.
Some of the less - Einsteinian Debt Settlement Companies have decided that as part of the "services" they offer, they will contact your creditors for you and inform them that you've entered a debt settlement plan. They are instructed to wait, and a settlement offer will be forthcoming.
The only part of this message the creditor will hear is "savings" and "payment".
They know that if you have money to put into a settlement account monthly, you have money to pay them.
They will run to the courthouse to make certain that money is diverted to them ASAP.
While you may have had 6-8 months time had you remained quiet, informing the creditor that you have disposable income but aren't going to send it to them... Will bump you to the head of the line for recovery litigation.
Welcome to wage garnishment and judgements!
They couldn't care less about your "debt settlement plan". They only care about what you owe them.
By this time your Debt Settlement Company has received it's percentage and informs you that it cannot do anything further for you but have a nice day.
Some of the more brazen ones may insist you stick with the plan and forge ahead.
The Aftermath:
At absolute best, a debt settlement company will leave you with a credit report full of negatives, perhaps one or two settled accounts (which report as "settled for less than full balance"- which is a negative) a 1099 form requiring you to pay taxes on the forgiven portion of the debt and a really bad taste in your mouth.
At worst, they'll leave you with a mailbox full of judgements, a wage garnishment, a horrendous credit report, and a settlement savings account that you may have trouble accessing to close out. And for this, they'll have charged you 15-20% of what you owed.
You could've filed bankruptcy for less money and possibly walked away with less damage to your credit.
All of this is assuming you've found a legitimate debt settlement company (oxymoron if I ever saw one defined) there are far too many out there that will happily take your deposits and then disappear completely, leaving you with nothing but a disconnected phone number and bad email address.
If you're going to make a mess, do it yourself.
If this is the way you want to approach your debts, do the savings yourself.
Deposit the money monthly into a savings account, and once you've accumulated enough to pay 50-70% of the first debt - attempt a settlement.
You'll still have a nasty credit report and have absolutely no protection from lawsuits - but you'll have accomplished that for 1,500-2,000 less money.
If you need it, you can't afford it.
A 10,000 debt, settled at 50% after 6 months will require you to deposit $833 every month into that savings account.
Can you save that much monthly? No?
Me either.
And there's the rub with debt settlement. If you could save enough to make a realistic go at it, you could've made the monthly payments all along plus some - thereby avoiding the entire situation.
It only works for those who don't need it. It doesn't work for those who try it.
But don't tell that to the Debt Management Companies, they're making a killing.
Ps this company has only been in business since 2004 per bbb
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