Debt Settlement Companies
These companies promise to settle your debts for pennies on the dollar. All you have to do is make a monthly payment to the Debt Settlement Company instead of your creditors. As time goes on, you build up a balance in your account with them and once the balance reaches a certain amount, they will settle with the credit card company for pennies on the dollar. These companies charge a fee of 15% of your total debt, and they collect this money before any money goes to your creditors, along with a monthly servicing fee that they charge. The salesman will tell you that all credit card companies are happy to work with them to settle these debts and that the harassing phone calls will stop.
This is not true! All it takes is one credit card company suing you to collect the debt and you are right back to where you started! Once the lawsuits start, you are generally better off filing bankruptcy so that all of your debts are addressed. No matter what, at the end of your successful bankruptcy case, all debts that are dischargeable will be gone forever. If you have debts that are not dischargeable, you can file Chapter 13 and have 5 years to pay the debt without interference by the creditor.
What About Your Other Debts Such as Taxes, Student Loans, Etc.? What if you owe debts that are not dischargeable in bankruptcy, such as student loans, certain taxes, or family support obligations ordered by the court? These debts cannot be discharged in bankruptcy and won't go away unless they are paid in full. The debt settlement company almost always will leave these debts out of the program because they can't settle these debts for less. In effect, they are ignoring debts that won't go away while funneling your hard-earned cash to debts that could be discharged in bankruptcy. Wouldn't it be better for you to put your precious cash toward debts that aren't going away before paying debts that you could discharge in bankruptcy?
There are substantial risks to using a Debt Settlement Company. While waiting for the company to settle your debts, you can be sued before the company can settle with a creditor. This happens frequently because either the credit card company doesn't want to wait to get 35% of what is owed, or they sell the debt to a collection agency who is definitely not going to wait. The salesman will tell you, if you ask, that they can't do anything for you when you are sued. If you are sued, you are generally in a worse situation than you were before you started this whole process. Do you really want to take this risk?