BBB: Don't settle for just any debt settlement company

July 18, 2010

Jan Jones, with the Consumer Credit Counseling Service of Alaska, says debt settlement doesn't work nine times out of 10. (Carolyn Hall/KTUU-DT)

by Christine Kim
Saturday, July 17, 2010

ANCHORAGE, Alaska -- The Consumer Credit Counseling Service of Alaska says it's seeing a rise in the number of Alaskans pushing their debt deeper into the red, and it's happening after they seek help from debt resettlement companies.

When people settle debt, they pay a portion of what's owed and the rest is forgiven -- an attractive idea in this economy. But the Better Business Bureau says some of the services offered by debt resettlement companies can be very misleading.

When plastic gets out of hand, there's a chance it can empty out your pockets. And when that happens, CCCS of Alaska says more people are turning to debt settlement companies without learning how they really work.

"Nine times out of 10, debt settlement does not work. Every client that we have had come through our office that has dealt with a debt settlement company has received severe damage to their credit report, and most of them have had to file bankruptcy," said CCCS of Alaska's Jan Jones. "Every one of the debt settlement companies that I have pulled up on the BBB has an F rating, because they don't work."

There are three kinds of debt settlement companies. One type is debt negotiation and settlement, firms which say they'll negotiate with credit card companies to lower payments for an up-front fee. There's also debt consolidation companies that offer to roll debt up into one payment. Then there's debt elimination, which is the biggest red flag.

The BBB has gotten reports and complaints about all three types of companies.

"People who don't talk to their lenders, they realize months down the road that they are even farther behind than they were at the beginning -- and they just gave a very high chunk of money to a company who did absolutely nothing," said the BBB's Tara Sims.

A typical settlement plan piles thousands of dollars in fees on top of what is owed. The fees, most of which are non-refundable, are paid first -- before any money is put aside to help pay off the original creditor.

"The way a debt settlement company works is that they save up a certain portion of money each month until they have enough that they think they can negotiate with your creditors, and they start with one," Jones said. "They're not all that they're portrayed to be."

That means even more damage to a credit report for people who have multiple creditors to pay back. And the money that's forgiven may not be too forgiving after all.

"Then that creditor turns around and reports that forgiven amount to IRS as income for you, so you'll owe taxes on that forgiven debt as if you had earned it," Jones said.

The BBB says there are companies that do work, but any claims of eliminating debt are a red flag.

If you do seek third-party help, the BBB recommends researching a debt settlement company online, both to ensure it's properly licensed and to get a BBB reliability report.

When you meet with company representatives, make sure you get everything in writing: what they charge, what the interest rate is and how much the fee is.

And if it sounds too easy, both Jones and the BBB agree: it's too good to be true.

CCCS of Alaska adds that you can settle debt by contacting creditors yourself instead of through a third party. In any event, debt settlement will damage your credit report.

Contact Christine Kim at ckim@ktuu.com

|

|

|