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Debt settlement: less a service than a curse for most debtors

We informed readers of the double-edged sword posed by debt-relief companies in a July 9 blog entry, referencing the "empty promises" routinely made by actors in that industry and the much worse positions many debtors actually find themselves in after contracting with such entities.

Today's post follows up on that earlier entry by conveying some updated and more detailed information on these companies.

We believe the "double-edged sword" metaphor is apt in describing debt-settlement agencies and their business plans, but only if it is clear that both sides of the blade aren't equally sharpened. The side that promises customer protection is in most cases both blunt and ineffective, with the keen edge pointed, ironically, at the very party who has been promised protection.

The Better Business Bureau states that debt settlement is an "inherently problematic business."

Here's why.

First, the companies offering help to persons dealing with creditors and facing stresses relating to foreclosure, repossession and other matters are for-profit entities, exclusively concerned with making money for themselves. Second, they will only "negotiate" with creditors after a consumer has stopped making payments. Candidly, doing that is never advised, since it spells default and brings about penalties and even higher interest rates. Third, statistics don't lie: The Federal Trade Commission and many state officials estimate that only about 10 percent of all consumers dealing with debt-relief companies ever realize any success through that interaction. Sadly, most of them ultimately find themselves in an even more precarious position.

What is the antidote to that?

First, no credible adviser would ever counsel a debtor to walk away from creditors and stop making payments. Debtors need to stay in touch and seek to work responsibly with their creditors. Second, consumers flatly need to be wary of any company that says that creditors won't sue people who owe them money and that unsecured debts can be satisfied for pennies on the dollar through a debt-settlement's company intercession. In any scenario, that is highly unlikely.

An experienced bankruptcy attorney can offer unbiased and accurate information concerning debt and a consumer's options when repayment on debts is becoming difficult or even impossible. A debt-settlement for-profit entity is no substitute for the knowledge and diligent advocacy that a proven bankruptcy lawyer can bring to bear on behalf of a client.

Source: National Association of Consumer Bankruptcy Attorneys, "The debt settlement trap: the #1 threat facing deeply indebted Americans," October 2012

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