C writes:
After spending a year (one of the worst of my life) working at a debt settlement company, I feel that I am obligated to warn as many consumers as possible about how badly you can ruin your financial situation by using one of these companies. My new job is at an all natural bakery, I no longer wish to swerve my truck into a tree on the way to work. Debt settlement is the process of eliminating your debt by ceasing payment to the creditor, and then negotiating with the card companies or collection agency to pay less than the balance owed. The debt settlement company charges a rather hefty fee for this service; however, the consumer should be saving money on the deal because they are paying significantly reduced balances to clear their debt. This is how it is supposed to work. This is not how it usually works.
The clients at the company I worked for ranged from lower class/blue-collar workers who were unable to find jobs, and had mounting medical bills to upper-class white collar workers who had incomes upwards of $9k a month, stay-at-home moms and college students. Some clients were only in $8,000 of debt, and some were upwards of $100,000. Their reasons for accumulating debt ranged from sick children and unemployment to simple avarice.
Our program was designed to eliminate a client’s debt in 36 months or less. The client would pay our fee, which was based on the amount of debt they were in, over a period of 12 months. At the same time they contractually agree (a contract I will elaborate on) to save a certain amount of money, so that when the time comes to arrange a reduced pay-off of their debt (usually 50% off of the owed amount), the money would be available, and the transaction would be complete. This sounds like a logical process, and when described to a potential client it is alluringly simple, convenient and quick. The sales person will convince the client that they will somehow be able to save money in their own accounts, and pay our fees for a year. It is nearly impossible for the client to save money due to the heavy fees. Other debt settlement companies will set up a savings account within their company, and the client is obligated to put a stipulated amount into savings every month. If they miss a month, they are canceled with no refund as per the signed contract. There were clients at my company whose income was only $900 a month, who were being asked to save $400 a month, and then put $200 a month towards the program’s fee. The program demands that the clients save and spend unrealistic amounts of money for their incomes.
The “client service agreement”, which I referred to as a “contract with Satan”, confounded most clients.
The contract is written in legal rhetoric that most people wouldn’t comprehend, but would end up being persuaded to sign anyways. The average client is not educated about credit reports, FICO scores, and legal vocabulary, so a sales person could easily talk them into the program. The contract actually states that the company is not responsible for any negative repercussions due to their enrollment in our program. It also stated we could cancel a client without refund at any time (which happened a few times in a year), and that if a client cancelled we were still due our year’s worth of fees no matter what. Money that we were practically guaranteed because we drafted directly from the client’s checking accounts. No person in their right mind would sign this contract if they understood what it meant.Our sales team and client liaisons ensure clients that if they withhold payments from their creditors, our representatives will effectively negotiate with the creditor, and all will be well. Yet, it states in the contract that our company does not interfere with the creditor/client relationship, and does not instruct clients to cease payment to the creditor.
Many clients had their wages garnished, had liens put on their property and their credit ruined because of not making payments to their creditors. The company was covered by our air-tight contract. If anyone client threatened to see a lawyer my boss would throw the signed contract in their face, and dare them to seek legal council. Usually when a client had finished paying our fees they couldn’t afford a lawyer anyways.I worked in administration while I was at this company. My boss (the owner of the company) made around $17,000 a month from people in debt. Side note: I was only paid $14 an hour, with no benefits, no sick days, and of course no paid vacation. I also felt miserable every day of my life there. My boss was ridiculously petty, money grubbing, and in my opinion he was the definition of a pig. He is the type of person that would sell-out their own grandparents for an extra few dollars. Although, I wasn’t one of the employees that were talking people out of their hard earned money and financial security, I felt sickeningly guilty knowing I was working at a place that basically stole from people. My fellow employees and I fielded calls all day from angry clients that weren’t paying the reduced balance to their creditors that they were promised at enrollment. Interest charges and late fees pile up on unpaid accounts, so that by the time a 50% pay-off is reached, the client is paying almost what they originally owed. We also had irate clients calling about wages that were garnished and complete harassment by phone from their card companies. My boss refused to take any phone calls, although he was the main decision maker, other employees who were supposed to be client representatives did their best to avoid phone calls because they were sick of being yelled at, or hassled. Getting help from the people who were supposed to be giving it is impossible at this company, and I’m sure it is equally difficult at similar companies.
Here is a short list of thing that horrified me while working there:
- A client was convinced to let their vehicle get repossessed. The sales person told them that while it was secured debt, they couldn’t deal with it, but if it was repossessed they could negotiate. Repossession stays on a credit report for 10 years, and can ruin a FICO score.
- A client with a terminally ill child had their wages garnished, although they were promised this would not happen. They were refused a refund, and lost the $3,000 they spent on the company’s fees and were still in a huge amount of debt.
- A client that angered my boss was cancelled without refund after paying around $1800 for the service. My boss didn’t like how the client spoke to him.
I could go on for several pages about all the things that were horribly wrong and unethical that I witnessed alone.
If there is a debt settlement company out there that is truly helpful to the consumer, I’m not aware of it.
The old saying “If it’s too good to be true, it probably is” is absolutely right. If a company is promising anything that seems beyond reason, they want your trust and then your money. The sales team at our company made a pretty decent commission rate from enrolling new clients. They will usually say whatever the potential client wants to hear, so they get that sweet bonus at the end of the month.If you are in debt there are a few things you can do that are helpful. If your credit score is decent you can usually negotiate a better interest rate or payment plan with the creditor. Always pay more than the minimum balance if possible because often only 1-2% of the payment is going towards the principle balance. If you pay off a card do not close the account, it’s best to keep it open and occasionally spend and pay off a small amount every month. Avoid debt-consolidation. Debt-consolidation is a process where a client pays one large payment, which accounts for all of their debt, to a company that then distributes the payments to the creditors. This process takes 4-7 years to complete, the payments are large and usually carry an interest rate or fee, and 70% of people that use debt-consolidation are in worse debt within 2 years of the program than they were before they started. Avoid bankruptcy, it is on your credit report for 10 years and it is a question you answer for the rest of your life. If you are already behind on your payments, and you have a reason for financial hardship such as unemployment, illness, some sort of disaster, you can often negotiate a reduced balance on your own. If a credit card company does not receive a payment for longer than 6 months, they will often accept up to 50% less than the owed amount, although you normally need proof of financial hardship.
The best advice I can give to get out of debt, is to pare down to the essentials. Sell some of your stuff, only spend money on necessities like essential food/gas/doctor’s visits, if you rent and you can break the lease get a cheaper place, getting a roommate is always an option, don’t be above getting a second job if it’s possible. A lot of clients were in debt because they couldn’t resist the siren call of a plasma screen TV, or a few new things at Banana Republic. They also drove cars that were beyond their income, and they couldn’t resist eating out a few times a week. If you are motivated you can get out of debt on your own, it won’t be easy, fun, or quick, but you won’t risk getting screwed over worse than you already are.
-C
More From Consumerist
-
Medical Debt Collector Banned In Minnesota For Harassing Patients In Emergency Rooms
-
CFPB’s First Criminal Referral Leads To U.S. Indicting Debt-Repair Firm For Defrauding 1,200
-
5 Warning Signs To Look For When Choosing A Debt Relief Firm
-
Man Behind Fake-Cop Debt Collection Scam Could Get To Know Some Very Real Convicts
-
Stop Worrying So Much About Your Credit Score And Focus On Your Finances
I work in the settlement industry and there is some truth in what “c” has said, unfortunately there are companies out there to only squeeze money out of people that are down on their luck. However, there are some good companies out there as well that are actually out to help people, take care of their debts, and get their life back on track.
At our organization, and I won’t mention the name for fear of spamming. We are encouraged to spend at least 45-60 minutes on the phone getting a clear understanding of the individual or families true situation. Probably 3 out every 10 people I contact I’m not able to help because they either are on a fixed income, or they have waited too long and their creditors have already taken legal action against them or they can’t afford to get out of debt in 3 years or less; creditors won’t wait forever to get paid; they do have other options.
1. If they are on a fixed income (ie..SS and/or Disability); we encourage them seek assistance from free Legal Aid or a Bankruptcy attorney. As a rule, we are not allowed to accept clients on a fixed income. It would be ridiculous to expect someone that makes $1200 month to pay $200-$300 of this to pay their creditors. Something usually has happened to cause a major loss of income, it’s not people trying to pull as fast one on someone.
2. Depending on the number of clients the company represents and their particular creditor relations is in a large part what the settlement amount that can be reached come from, in addition to the particular persons situation. Contrary to what the credit card companies would have you believe, they often do settle for as low as 15 cents on the dollar, and I’m talking major original creditors like Bank of America, Chase, Wells Fargo, WAMU, Citibank. Generally 50 cents or less is what can be negotiated. So I disagree with MuCow…there is always power in numbers and I know that we achieve much lower settlements than individuals can. Indviduals can get settlement offers but the catch is the credit card company wants them to pay it back in 3-6 months, and bring their balance up to date first. What usually happens is the consumer can’t complete all the payments…so the original balance goes back on.
Credit card companies are in a pinch, and the sad fact is alot of people have their ARMs (Adjustable Rate Mortgages) going up and they have made the decision to keep their house rather than pay the high interest rates of some companies. I can’t blame them; at tleast with settlement they are taking some responsiblity and offering to pay back their creditors something.
I’ve seen this year, a 46,000 credit card bill (2-cards) with a major credit card company, reduced to $6900 and that particular person was in and out of the program in 90 days…doesn’t happen that often, but it does happen. Another one $5000 credit card bill reduced to $800.00; so it works on both small and large credit cards.
There are also some things that MuCow left out about the collection industry as well.
If the debt is sold (not assigned), it is generally purchased by a third party collection agency for as low as 8-20 cents on the dollar. So when they start tacking on additional fees on the original purchase amount, then offer to discount these if ‘you can take care of in 3 or 4 easy payments’, they are still making a huge profit, and some collection agencies are notorious for threatening, harrassing and plain out lieing to people about what they can do to collect (ie..you better pay us or we are going to garnish your social security!).
I believe that we are doing a good service for people that need help right now. The settlement industry is a necessary evil because the credit card companies continue to take advantage of people by continuing to send millions of preapproved credit offers to people that are already in trouble. Then they jack up their interest rate to $23.99% or higher and hit them with late fees and overlimit fees when they can’t pay. At 23.99% if someone is paying minimum payment (generally 2% of their balance) only .01% is going to principal. No wonder it takes people 20+ years to get out of debt.
The settlement industry is like any other, there are good companies and there are bad companies trying to take advantage of people.
The best thing a consumer can do if they feel this is an option for them is do there own research on a company BEFORE signing up with any program.
http://www.ripoffreport.com is a good tool to look up any type of company; much better than the independently owned franchises of the BBB around the country.
~L
One last thing I forgot to mention, for some people that may not know the difference.
Debt Consolidation companies work on reducing the interest rates of your credit card companies, some companies don’t participate in these interest lowering programs, and usually if you miss a payment or two they bump your interest back up. You also have to rely on the debt consolidation company getting your payments to your creditors on time because you pay them, and they pay your creditors. This method also has negative credit effects on your credit profile. You are still responsible for the entire amount owed and you are still being charged interest on the balance while in the program.
Also NPO Consolidation companies are usually paid a percentage of the client’s payment from the credit card company, on top of their own monthly service fee; so the word non-profit is somewhat misleading.
Debt Settlement works on the balance owed; not interest.
Now I can only speak for my company, but our company negotiates only from the principal balance owed when the individual enters our program. Settlement is reached from the balance, and before the creditor is paid, we require a letter from the creditor stating that they are accepting payment for the client’s account in full & that their credit report will be updated with a -0- balance. This protects the client from having a creditor come back later and saying that they still owe the difference or late penalties or fees. It would be unfair to the client to be charged penalties and late fees on a balance they couldn’t afford to pay in the first place.
The credit report will show a series on nonpayments, then -0- balance when the debt is settled.
The creditors are kept up to date on the clients progress and can log-in and see that clients are making their monthly savings comittments. They know they are not getting paid back monthly, but they also know that they will get paid back in a relatively short amount of time. The client is updated with monthly calls. The system works, but only if everyone involved (both the client and the creditor) are all on the same page.
Not all states allow organized debt settlement, unless passed through a local attorney, and many states have a limit on the number of years that an individual can take to get out of debt through settlement.
Debt settlement companies have specific compliance guidelines regarding proper disclosure, that they have to follow, that are required by the Federal Trade Commission.
At my company our calls are randomly monitored for compliance, and we have roving compliance managers that walk around and listen to make sure they we stay compliant.
~L
Wow. Consumerist and staff, you are providing a service of real value here. And, thanks to “C” for writing this. I was always wary of those debt settlement offers I’ve seen on TV, but this is much worse than I imagined, and very sobering. Another bunch of predators disguised as a help agency, preying on people who are at their lowest point in their lives and don’t know where to turn.
I have considered these companies from time to time, but I always thought they seemed to be too good to be true. Good to know my gut instinct was correct.
In my work I come across a lot of finance guys. One of them was a finance manager at a car dealership (probably not high on the angel list either) and he was telling me just how many people get messed up by these companies. I wrote a warning about it on my credit report article. Customers come in thinking that their credit is just fine because it has been “negotiated” without realizing that whether the companies reduce the amount owed to 0 or not, they still report the amount as UNPAID. To your credit report that’s the biggest black mark you can have short of bankruptcy. So, even if the debt goes away, you and your 416 credit score won’t get a loan anywhere.
That would be true Brian….unless you require the creditor to put it in writing.
Here is an excerpt from a recent settlement with CHASE.
The original balance was $17,828.33
“We are pleased we found a settlement that works for you. This letter confirms that we agreed to settle your credit card account for $6000.00. As a result of this settlement, you will benefit from all these advantages:
You will only pay $6000.00, a significant savings over the full balance. We will stop all attempts to collect. Upon conclusion of the settlement, we will report your account to the national credit bureaus as settled with a remaining balance due of zero (0.0)”
~L
I would really like to clarify some misinformation that is out there. Debt settlement, debt consolidation and debt management are three different things. I think the debt settlement information in the post is good. However, a credit counseling company that puts clients on what is known as a Debt Management Plan is not the same as debt consolidation.
The term consolidation most often refers to a loan. The individual takes out one big loan, and in turn pays off his or her other creditors. When a client enrolls in a debt management plan, the client does make one payment to the credit counseling agency, but the individual creditor still exist. People lump all of these debt relief options together when they are actually very different.
I happen to work for a non-profit agency and can offer this advice: Research a company before you do business. Check with the BBB and your state’s attorney general’s office. Also, a good place to find a reputable agency is through the National Foundation For Credit Counseling (www.nfcc.org). They will direct you to a qualified, non-profit agency in your area.
Some other things to watch out for:
1) High fees. A reputable agency should offer services at no or low cost.
2) Education. An agency should do a credit counseling/budget management session with you before enrolling you in any type of plan. This should last about an hour. They should make practical suggestions to help with your finances and budgeting.
3) Avoid agencies that pay their counselors a commission.
4) Avoid agencies that rush you into a debt management plan. The agency should not sign you up on the phone. They should send you an informational packet and give you time to decide.
Many people can benefit from these services. Unfortunately there are some bad players in the industry, so it’s important for consumers to educate themselves before signing their money over to a company.
I may be making a comment that is contrary to popular opinion here, but I know of reputable companies who do debt settlement. I think every industry has honest people and also dishonest people; industries such as cars, real estate, doctors, lawyers, etc. It’s not fair or (educated) to take 1 experience with an obviously dishonest company and label an entire industry. Debt Settlement is becoming more regulated and now counselors have to be certified. As this happens, the bad apples will begin to fall off as it takes more work for them to do business. I would reccomend that people do their homework at the BBB before making a choice in debt settlement and also make sure the company is reputable. I have seen contracts that allow people to cancel at any time and if they have money in their trust account at that time, it is refunded to them. Because I know of people who have benefitted from debt settlement I want to say that we shouldn’t discredit the service itself because of a dishonest company experience. Debt settlement serves a niche in helping people avoid bankruptcy but still pay back a portion of what they owe, maintaining their personal pride and commitment.
This is all true. My confessions are nearly the same, as I come from the industry as well, but from management and worked there awhile longer. I worked for a leader in the industry so it wasn’t some fly-by-night shop.
Debt settlement is not a bad option itself though. It’s just the companies that are offering this service are taking advantage of people in desperate situations. Save thousands by negotiating on your own. Check out mariedanielservices.com for more info on this. Do-it-yourself debt settlement with a personal approach.